US investors paused for breath after a heady run which had propelled the Dow Jones and S&P500 to record highs, as wider concerns loomed into view.
Escalating tensions in the Middle East continue to weigh on markets, while there is also some inevitable uncertainty ahead of the US election, which is now just two weeks away and where the two candidates are neck and neck in the Presidential race. At the same time, the continued resilience of the economy has led bond investors to wonder whether the pace of interest rate cuts will slow, with yields popping higher and with consumer and housebuilding stocks drifting lower at the possibility of rates remaining higher for longer.
This scenario has played out many times over recent months and a usual beneficiary of renewed rate uncertainty is the technology sector and high-growth stocks in particular. During the session, both Nvidia (NASDAQ:NVDA) and Apple (NASDAQ:AAPL) closed at individual record highs, leading to some strength in the Nasdaq which brings its cumulative gain in the year to date to 23.5%, and just 0.6% from its record close as previously achieved in July. This compares with gains so far this year of 14% and 22.7% for the Dow Jones and S&P500 respectively, with the general direction of interest rates still expected to head lower, although the pace of these reductions is up for debate.
Meanwhile, the earnings season continues apace with an estimated 70% of companies having beaten expectations so far, albeit against estimates which had been sharply revised lower in the lead up to the current reporting period. Increasingly stretched valuations are also raising the bar for companies to be able to significantly outperform estimates, and taken as a whole with other global factors, the immediate outlook could well be for a choppy ride for markets.
This slightly negative lead from Wall Street washed through to Asian markets overnight, with most indices in the region slipping lower. In the absence of any notable economic data being released, investors were left to ponder the effects of a slowdown in the pace of interest rate cuts in the US which, all things being equal, would be dollar-positive which is traditionally a negative sign for Asian equities.
Such global uncertainty has led to a long list of bullish drivers for the gold price, which has now risen by 34% so far this year and has set several new records along the way. Quite apart from geopolitical tensions, the imminent US election and questions over Chinese commodity demand, the precious metal has reportedly attracted other buying interest in addition to its appeal as a haven investment. There has apparently been some sustained buying of gold by the Chinese authorities in an effort to reduce their reliance on the US dollar amid the fractious relationship between the two countries, while other central banks have also been adding to their gold holdings. The possibility of a lower dollar, with its inverse relationship to the gold price, could also provide further gains.
Early economic news in the UK hardly improved the mood, with reports that borrowing for September was the third-highest on record, as spending on debt interest and public sector pay rises outstripped the tax revenue take. While the figure of £16.6 billion was lower than the £17.5 billion forecast, the borrowing level was more than £2 billion higher than the corresponding month last year. With an imminent Budget which is expected to heap further pressure on certain parts of the economy, the prevailing sense of caution as evidenced by a dip in consumer and business confidence is unlikely to reverse in the immediate future.
The FTSE250 reflected the mood music with a dip at the open, although the index remains ahead by 6% so far this year. In the premier index, Fresnillo (LON:FRES) was a rare riser given its exposure to gold and indeed silver, another precious metal which has enjoyed significant gains of late. InterContinental (LON:IHG) Hotels saw its shares dip despite a trading update which revealed continuing strong demand and trading momentum as weaker sentiment overrode the positive noises. The FTSE100 is now ahead by 7.2% in the year to date, although a return to its previous high as recorded in May has proved a step too far of late given wider economic pressures.