The FTSE 100 made a valiant effort to rebound on Tuesday after yesterday’s earth-shattering selloff rocked the global equity market.

London’s leading index recovered some of the lost ground in early trade on Tuesday, although it barely made a dent in the losses inflicted in recent weeks. The rally was quickly sold into as the session progressed, but the losses were minor compared to recent days.

Selling such as we witnessed rarely proves to be a bottom of an equity sell off.

That said, investors were encouraged by a dramatic rally in Japanese equities overnight. The Nikkei surged 10% in last night’s Asian session as traders bought into a cataclysmic 12% selloff in the prior session.

One of the main reasons behind the recent volatility is the unwinding of the Yen carry trade after the Bank of Japan increased interest rates more than expected last week. Investors have become used to borrowing Yen to finance investing activities elsewhere, and the reversal of this trade has been near-apocalyptic for global markets.

A show of strength in Japanese equities overnight will have gone a long way to alleviate some of the fears associated with the Yen carry trade, but markets are not out of the woods yet. Concerns about the health of the US economy and overpriced technology stocks still linger. 

“Investors shouldn’t assume this relative calm means markets are back to behaving rationally again: the volatility index (vix) is still at elevated levels, suggesting more turbulence to come,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.

“The good news for longer-term investors is that no single piece of this puzzle warrants such a massive shift in sentiment, this looks to be more about a perfect storm of factors. Calmer waters should prevail and longer-term growth trends like the AI revolution remains very much intact.”

Traders will also be relieved to see Palantir, a US tech stock heavily associated with artificial intelligence, smash earnings estimates and rally some 7% in the premarket.

In the UK, Rightmove was the FTSE 100’s top faller after it said a key contract would be terminated 1 September, resulting in a loss of around 3% of the group’s lettings members. Rightmove shares were down 4% at the time of writing.

Rolls Royce was 2.8% higher after JP Morgan increased its price target for the engine-maker to 456p.

Travis Perkins is a perfect play on the recovery of the UK housing market. It will undoubtedly be one of the biggest beneficiaries of the Labour government’s push to build 1.5 million during their tenure.

However, that push is yet to get underway, and today’s numbers highlight the challenges facing the UK construction industry. Travis Perkins admitted any benefits from a housing push and lower interest rates would take time to effect underlying performance.

A slow construction industry in the first half of 2024 has translated into a 33% drop in operating profits for Travis Perkins in their first half period. Falling profits were a result of price deflation and falling volumes.

“Travis Perkins was galvanised by Labour’s election win with their share price jumping by 25% in July. However, the honeymoon period looks to have been short lived as the reality of the challenges facing the business have come flooding back into view,” said Mark Crouch, Market Analyst at investment platform eToro.

“The UK’s largest supplier of building materials has suffered a steep drop in profits in the first half of 2024 after demand for housing and building supplies continues to wane. And while Travis Perkins has substantially improved operational effectiveness and its overheads within the business, market conditions are making things increasingly difficult. 

“Despite glimpses of positive data starting to emerge to suggest housing is on the up again, higher interest rates and the cost-of-living crisis still weigh heavily on consumers.”

Travis Perkins said it was on track to exit loss-making Toolmaker France as it streamlines the business to focus on the most profitable areas.

Helium One Global shares rose after announcing progress in its exploration efforts at the Itumbula West-1 (ITW-1) well in Tanzania. The company, a leader in Tanzanian helium exploration, said it is now ready to begin extended well testing across two key intervals.

Helium One Global’s next step is to commence tests focusing on two intervals: the fractured basement and the faulted Karoo group.

The ITW-1 well has been successfully re-entered and deepened by an additional 168 metres into the basement, reaching a new total depth of 1,129 metres measured depth. Investors will be pleased to hear the company encountered near-continuous helium and hydrogen shows during the deepening process.

Helium One Global shares were 10% higher at the time of writing.

The company’s immediate focus is now on preparing the wellbore for the installation of 7″ slotted casing and subsequent cementing operations. Following this, a completion string comprising tubing and packers will be run into the hole, enabling multiple testing of the two zones during the extended well test.

“We are pleased that we have been able to re-enter and deepen the ITW-1 well as planned. It has been very encouraging seeing the helium and hydrogen shows continuing whilst drilling this deeper section, and we look forward to evaluating these results further through the EWT,” said Lorna Blaisse, Chief Executive Officer.

“I’d like to extend my thanks to the wider team in a safe execution of this drilling phase, as well as the continued support from the Ministry of Minerals and Mining Commission in Tanzania.”

The FTSE 100 tumbled on Monday as US recession fears gripped markets, sending global equities into freefall as some investors called for an emergency US rate cut to reinstate the so-called ‘Fed put’.

The FTSE 100 was down 3.2% at the time of writing and was relatively unscathed when you consider the Japanese Nikkei was down a whopping 12% overnight as traders piled into the Yen. US futures pointed to a 4% decline for the S&P 500, while NASDAQ 100 futures were down around 6%.

A stronger Yen has a far-reaching impact as worries about the Yen carry trade sapped the life out of risk assets.

“Friday’s brutal sell off has continued into the new week as investors mull the prospect that the much-touted US soft landing looks like being a whole lot bumpier than markets had hoped,” said AJ Bell head of financial analysis, Danni Hewson.

“Circuit breakers have been firing on Asian markets as stocks tumbled, with investors scurrying to price the impact a stalling US economy is likely to have.

“Friday’s jobs figures dropped like a bucket of cold water on markets already chilled by mixed earnings updates and concern about levels of spending by big tech companies on AI plans.

The VIX volatility index hit the highest level in over a year on Friday as traders reacted to the potential for a deeper selloff in equities if a US recession takes hold. Signalling further fear among traders, the VIX, which tracks short-term S&P 500 options trading activity and is a renowned measure of investor sentiment, spiked higher again on Monday.

The global equity selloff was sparked by a poor Non-Farm Payrolls jobs report suggesting the US economy is heading toward a recession. After fretting about when major central banks will cut interest rates, traders appear to have forgotten why central banks tend to cut rates in the first place: economic growth concerns and slowing inflation.

Speculation about an emergency Federal Reserve rate cut was rife over the weekend, although there is no formal suggestion they will move to cut rates before the next meeting. Some analysts expect the Fed to signal sharp rate cuts in the coming months as opposed to making them before the September meeting to help provide confidence.

“This is precisely the point where we’d expect the Fed to affirm it’s ‘Put’, one way or another,” said George Lagarias, chief economist at Forvis Mazars.

Bond yields sank at the end of last week, and the rally continued into Monday’s session. In June, we highlighted three Bond Funds to consider for a shift in interest rate expectations. Needless to say, all had a very good week last week.

All but three FTSE 100 stocks were down at the time of writing on Monday with tech-focused Scottish Mortgage the biggest faller with a drop of 8%.

Banks were heavily hit, as were miners and the oil majors. There is no stock-specific reason for the declines, and the selloffs were a result of a broad risk-off trade.

Lloyds’ share price has declined quickly and violently amid a global equity rout sparked by US growth concerns and a collapse of Japanese equities.

With shares trading around 54p—significantly below recent highs of 60p—investors may have their eyes on the FTSE 100 bank. However, headwinds are building that investors should consider.

Notwithstanding the global equity selloff rocking equity markets, Lloyds shares face several factors limiting income and eroding profit. Some argue that they aren’t fully priced at current levels and that investors may find better value at lower levels.

Lower interest rates

Although Lloyds shares rose steadily on the day after the release of half-year results, the update offered few positives over the coming 12-24 months. The declines in the last few days are more representative of Lloyds’s macro challenges in the short and medium term, which are likley to lead to weaker metrics than those reported last week.

The hammer blow to Lloyds shares came with the Bank of England interest rate cut and the firing of the starting gun on a series of rate decreases, which will ravage Lloyd’s all-important net interest margins (NIM). 

Lloyds NIM was down 10% in the first half, and it’s very difficult to see how the bank doesn’t post an equally disappointing NIM for the second half of the year. 

Net Interest Margin (NIM) is a key banking profitability metric that measures the income derived from the difference between interest earned on lending activities and that paid out for deposits. Lower interest rates are rarely good for banking NIMs, and this threatens Lloyd’s profitability in the coming periods.

Lloyds is the UK’s largest mortgage provider, and the recent rate cut has already started to affect mortgage rates, signalling lower income for banks across the board.

Rising unemployment

There are a range of economic data points which will present challenges to Lloyds and other UK banks. However, none threatens profitability more than the UK’s rising unemployment rate. Since hitting a low of 3.8% in December 2023, the UK unemployment rate has increased to 4.4%.

There is a strong correlation between the unemployment rate and the UK housing market—one that investors should be acutely aware of. When the unemployment rate increases, defaults and repossessions rise, leading to higher provisions by banks for bad debts. Should Lloyds be forced to make such provisions, it will erode already-pressured income caused by lower interest rates.

You may think the rate cut last week will provide a boost to mortgage holders and the UK housing market. And to some extent, it will. However, if a greater number of people start losing their jobs, saving a couple hundred pounds on a mortgage will be of little consequence if they lose their income entirely. Such a scenario is not guaranteed, but the probability of more people finding themselves in difficult situations is rising.

In addition to provisions for bad debts amid rising default rates, Lloyds investors will be conscious the group is facing potential litigation costs from a car finance probe.

Lloyds share price

With the bank’s headwinds building, some investors will wait for the Lloyds share price to hit 50p before buying, while others will keep their eyes on the low 40s before wading back in. 

The Lloyds dividend will provide some compensation for waiting for any capital appreciation. However, the potential yields to be locked in at lower levels may give some reason for pause.