In the absence of a lead from the US, global markets drifted, with attention now turning to the latest interest rate decision from the Bank of England.
Closed for the Juneteenth public holiday, US markets will resume looking to build on new record highs for both the S&P500 and the Nasdaq, driven primarily by ongoing excitement around the potential for AI, with Nvidia (NASDAQ:NVDA) in particular leading the surge. At this very early stage, futures are pointing marginally higher, with releases due later today on both housing starts and initial jobless claims likely to feature in the day’s direction of travel. These will add to the weaker than expected retail sales figure from earlier in the week, reigniting the debate on the likelihood of interest rate cuts from the Fed given the importance of the consumer to US economic fortunes.
In the meantime, going into the return to trading the main indices are each up in the year to date, with the Nasdaq ahead by 19%, the S&P500 by 15% and the Dow Jones by 3%. The more pedestrian performance of the more traditional Dow index has added to concerns that recent equity rallies have been narrowly focused on the mega cap technology stocks, as opposed to a more broadly based recovery. The impending half-year reporting season will begin next month, which should provide a more focused update on the performance of corporates on the ground.
Asian markets were mixed to lower overnight in light trading, and without any pointers from Wall Street. Both Chinese and Hong Kong markets were weaker as real estate shares weighed in an ongoing sign of the need for a boost to economic performance. The Chinese authorities did not step up to the plate having left the key lending rates unchanged, although they are reportedly willing to keep monetary policy accommodative to support the economy. To date, this has not been to the extent which investors had been anticipating, resulting in an investment exodus from the region.
Without doubt, the highlight of the day in the UK will come as the Bank of England announces its latest decision on interest rates. The market has ruled out a cut today, but the accompanying comments will be scrutinized for any signs that the Bank is preparing to ease its current grip.
The decision follows the announcement yesterday that headline inflation fell to 2%, in line with the Bank’s target for the first time in almost three years. However, underneath the bonnet core service prices remained elevated at 5.7%, ahead of estimates, which is likely to consolidate the no-change decision. It is believed that the Bank of England considers this measure to be a more relevant measure of inflation risk, and in any event the headline number will likely need to stay at current levels over the coming months before the Bank feels comfortable in pulling the trigger.
As such, the jury remains out on the timing of such a reduction in rates. In terms of consensus, August is currently a reasonably strong candidate, although there is a growing belief that such a move will not happen until September, or perhaps even later should the current price pressures persist. In any event, there is only one cut being priced in this year, in an echo of the likely path of the ECB and according to its most recent outlook, the Fed also.
Ahead of the decision, markets were largely unchanged at the open. The FTSE100 was weighed down somewhat by the usual clutch of stocks being marked ex-dividend on a Thursday, including Persimmon (LON:PSN), United Utilities and Experian (LON:EXPN). The announcement that Sainsbury would be selling its core banking business to NatWest (LON:NWG) was warmly received, with the shares rising by more than 2%. The move was previously trailed, but nonetheless represents a back to basics attitude whereby the supermarket can focus on its core offering rather than subsidiary operations. The move is also similar to the recent agreement between Tesco (LON:TSCO) and Barclays (LON:BARC), whereby some capital light income businesses will be retained, such as insurance and travel money services.