Equity markets bounce back from last weeks sell off. The TPP weekend update.

A Better Week for Stocks

The FTSE 100 gained some ground to close up 0.39% at 8,273 on Friday, marking the second straight session of advances. Over the week the FTSE 100 rose 1.12%.

The UK economy was unchanged for a second consecutive month in July as manufacturing output contracted. Economists had expected GDP growth of 0.2%. However, over the three months ended July 31, inflation-adjusted gross domestic product expanded by 0.5% sequentially.

Investors now look to next week's central bank announcements, including those from the Federal Reserve and the Bank of England. Expectations of a potentially bigger-than-expected rate cut by the US central bank were raised after former New York Fed President Bill Dudley said on Thursday that there was a strong case for a 50 basis point reduction.

On the corporate front in the UK, precious metal miners led the gains tracking a rally in gold prices. Miner Endeavour Mining shot up over 7% and Fresnillo surged nearly 6%. Vodafone added 1.1% even after Britain’s competition watchdog raised concerns about their $19 billion merger with CK Hutchison’s Three UK. The Competition and Markets Authority said that the merger could lead to a “substantial” lessening of competition and higher prices for consumers.

On the downside, AstraZeneca (-1%) was knocked lower by a downgrade to ‘sell’ at Deutsche Bank.

In currency markets, sterling was up around 0.1% on the dollar trading at $1.3137, and up 0.03% against the euro to trade at €1.1855.

In economic news, public expectations for inflation in the UK declined to their lowest level in three years, according to the Bank of England's latest quarterly inflation attitudes survey. Inflation expectations for the coming year dropped to 2.7% in August from 2.8% in May, marking the lowest reading since August 2021.

While expectations for the subsequent 12 months remained steady at 2.6%, the five-year outlook edged up slightly to 3.2% from 3.1%. The survey is closely watched by the Bank's Monetary Policy Committee.

Committee members are scheduled to meet next Thursday, with the current interest rate standing at 5% most analysts expected rates to remain unchanged, with a potential 25 basis point cut expected later in the year.

Inflation had reached the Bank's 2% target earlier in the summer but ticked up to 2.2% in July, according to data released last month. The Bank of England projected that inflation will continue to rise modestly in the coming months, peaking around 2.75% before falling below 2% next year.

Europe

The STOXX Europe 600 Index ended the week 1.85% higher, lifted by an interest rate cut from the European Central Bank (ECB). Major European benchmarks all added gains this week with Germany’s DAX increasing by 2.17%, France’s CAC 40 Index by 1.54%, and Italy’s FTSE MIB by 0.83%.

The ECB lowered its deposit rate for a second time this year, announcing a quarter-point cut to 3.5% that was in line with expectations. The move came amid signs of weakening economic growth and slowing inflation in the eurozone. The statement accompanying the announcement emphasized that the ECB remains cautious and indicated that the ECB is not “pre-committing to a particular rate path.”

The updated quarterly forecasts for headline inflation remained unchanged, but core inflation was revised slightly higher for the next two years due to stronger-than-expected services prices. The ECB now expects the economy to expand by a percentage point less this year (0.8%), 1.3% in 2025 and 1.5% in 2026.

The U.S.

US stocks managed to post solid gains this week and largely recovered from the previous week’s steep losses, which saw the S&P 500 Index suffer its worst weekly decline since March 2023.

Growth stocks outpaced value shares by a wide margin, helped by strong performance from technology stocks. NVIDIA was a particularly strong contributor after the chip giant offered a positive outlook on artificial intelligence at an investment conference.

NVIDIA stock is incredibly volatile at the moment as investors look for a fair value for a stock whose current earnings have exploded but also has to be priced on the rate of its future potential earnings (which are relatively unknown). We have seen several daily moves of over 5% in recent weeks which equates to equity swings of about $140 billion. With its current $2.9 trillion valuation, this alone is enough to move the market.

The week’s relatively light economic calendar was dominated by the Labour Department’s inflation reports. On Wednesday, stocks initially headed sharply lower following news that core (less food and energy) consumer inflation rose to 0.3% in August, a tick higher than consensus expectations. Meanwhile, headline inflation showed an annual increase of 2.5%, well below July’s increase of 2.9% and its lowest level since early 2021.

Treasury yields ticked lower during the week with the yield on the benchmark 10-year Treasury note trading at year-to-date lows. (Bond prices and yields move in opposite directions.) Tax-exempt municipal bond yields were little changed as investors eyed the heavy new issuance expected over the next few weeks. Municipal inflows for the week represented the second-largest weekly total for the year to date.

Asia

Japan’s stock markets registered mixed performance over the week, with the Nikkei 225 Index gaining 0.5% and the broader TOPIX Index down 1.0%. The country’s exporters continued to face currency headwinds as the yen strengthened to the high end of the JPY 140 range against the USD, from the prior week’s JPY 142.3 amid a hawkish outlook on the Bank of Japan’s (BoJ’s) monetary policy.

On the economic front, Japan’s second-quarter gross domestic product growth was revised lower. According to final data, the economy expanded an annualized 2.9% quarter on quarter, less than the 3.1% growth suggested by the preliminary reading and market forecasts of 3.2%. The contribution from private consumption and capital expenditure was weaker. In inflation developments, the consumer goods price index rose 2.5% year on year in August, slowing from the previous month’s 3.0% and below consensus estimates of 2.8%. The rebound in the yen has caused a sharp fall in import cost growth.

Chinese stocks declined as weak inflation data spurred concerns about a downward price-wage spiral weighing on the economy. Both the Shanghai Composite Index and the blue-chip CSI 300 fell 2.23%. In Hong Kong, the benchmark Hang Seng Index gave up 0.43%, according to FactSet.

China’s consumer price index rose 0.6% in August from a year earlier, up from 0.5% in July, but below economists’ forecasts. Core inflation, which strips out volatile food and energy costs, increased 0.3%, slowing from July’s 0.4% rise, and marked the lowest level in over three years. The producer price index fell 1.8% from a year ago, lagging forecasts and deepening from July’s 0.8% drop, extending the deflation in factory gate prices that began in late 2022. The latest data spurred calls for Beijing to roll out more forceful measures to stave off a negative cycle of falling corporate revenue, wages, and spending that many analysts believe threatens China’s longer-term growth.

The Week Ahead

Macroeconomic headlines next week are set to be dominated by interest rate decisions by both the Federal Reserve and Bank of England. Having initially cut its base rate from 5.25% to 5.00% in August, expectations are that the Bank of England will hold when the latest call is announced on Thursday.

Federal Reserve policymakers are in line to begin their interest rate cutting cycle when updating on Wednesday, with markets still split over whether the first cut will be by 25 or 50 basis points.

Barclays analysts noted the lack of a “smoking gun” in UK economic data meant the Bank of England should stick to a cautious path of gradual reductions.

In the US, the focus has shifted from cooling inflation to propping up the labour market, IG analysts explained, with a collective 115 basis points worth of cuts expected by the year-end.

Also due next week is retail sales data from both sides of the Atlantic, coming on Tuesday for the US and Friday in the UK.

UK inflation data for August is also set to be released on Wednesday, with markets expecting a 2.2% reading in line with July’s growth and again above the Bank of England’s 2.0% target. We wouldn’t be surprised if this actually comes in slightly lower.

Next week sees several retailers reporting, including Next as it looks to build on an impressive run, as well as Kingfisher and Ocado.

First though, life insurance and pensions specialist Phoenix will kick off proceedings on Monday, before B&Q owner Kingfisher’s report on Tuesday.

Analysts suspect the retailer to have enjoyed growth in the UK but still be grappling with subdued conditions in France. Moonpig then takes centre stage on Wednesday, ahead of Next and Ocado’s updates on Thursday, which are all set to paint a picture of the health of the consumer environment.

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Action on the TPP platform

Coming into this week nearly all of our strategies had a BUY/LONG bias. The trackers were tracking, the long or flats had bought into the fall the prior week and the active equity long short strategies also had an overall BUY bias. As the week evolved, some profit was taken in the Dow, Russell 2000, FTSE 100, Dax and Cac.

The trackers continue to track, but many of the long or flats moved into a market neutral position or a smaller BUY bias as the markets closed in the US last night.

The active strategies also looked relatively hedged as the week closed.

What could one read into this?

Firstly, many of the strategies were content with the profit offered to them in certain markets, and secondly that there is uncertainty over the market direction at the moment.

For every bull there seems to be a bear, and it's been that way for a couple of months now. We've been content as of late as we've seemed to move into the market at the right time and out of it in a similar way. However, the reduced bias certainly suggests there is caution out there.

Next week is another week and it will be interesting to see what tweaks are made to strategies across the board.

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Have a great weekend and we’ll be back on Wednesday with a midweek update on the markets.

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