Today’s markets: Awaiting the next big inflation test

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We’re slap bang in the middle of August but markets aren’t quite in their summer slumbers. While another rough session in Asia overnight hasn’t meant big pain for European indices, there are data points this week that will rouse investors’ interest.

The Hang Seng closed down 1.6 per cent this morning on renewed concerns about the Chinese economy. Troubled real estate developer Country Garden, once the largest in the country, suspended trading in some of its bonds after missing payments last week. That sent property shares slumping once again, and other Asian markets dropped in sympathy: the Nikkei closed down 1.3 per cent. Tomorrow will bring Chinese industrial output and consumer spending figures: they’re unlikely to stop the rot, but Asian investors will take what they can get at the moment.

The mood is calmer closer to home: France’s Cac 40 and Germany’s Dax have reversed early losses to trade 0.3 and 0.5 per cent higher, respectively, by mid-morning. The FTSE 100, with its greater share of China-sensitive commodity stocks, was 0.2 per cent lower.

That said, UK indices have pulled their weight a little more in recent weeks, having outperformed peers since the start of July. That’s all relative – it’s hard to get too bullish when the large-cap index is at a four-week low – but (whisper it) even smaller companies have shown more signs of resilience of late.

Much of this has been fuelled by the belief that UK inflation rates are belatedly starting to follow Western peers downwards. Traders now await Wednesday’s figures, hoping that July’s figures will surprise on the downside as much as June’s did. Expectations are for a big drop, from 7.9 per cent to 6.7 per cent. Undershoot that and bets on the end of the Bank of England hiking cycle will ramp up once again, particularly if services price growth also cools off.

One downside to this scenario is renewed sterling weakness, the pound having already fallen from $1.31 to $1.27 over the past month. That will at least help prop up investors’ returns from overseas shares, many of which could do with a bit of help at the moment. The big US semiconductor plays, not least AI poster child Nvidia, had a tough time of it last week. The economy’s proving more resilient than expected, but some of the heat has come out of the market all the same. Rising bond yields at the long-end of the curve have caused concern this month: the prospective ‘soft landing’ means the Fed will have little incentive to cut rates as quickly as people think.

For more on what’s going on this week, click here.

The Trader is written by Dan Jones

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