The Bank of England announced the first interest rate cut since the start of the COVID pandemic.

The BoE cut its key interest rate by a quarter point to 5.00%, its first reduction to borrowing costs since the start of the coronavirus pandemic in March 2020. However, it was a split decision with the Monetary Policy Committee voting 5-4 in favour of the decision.

Governor Andrew Bailey also signalled that policymakers were not about to embark on a rapid succession of cuts, stating, “We need to make sure that inflation stays low and be careful not to cut interest rates too quickly or by too much.”

Markets took the news well but it didn’t last long. On Friday a disappointing US jobs report took global stocks into a tailspin. In London stocks closed in negative territory on Friday as investors reacted to a weaker-than-expected non-farm payrolls report from the United States, indicating a sharp slowdown in hiring last month.

The FTSE 100 fell 1.31%, ending the day at 8,174.71 points, while the FTSE 250 experienced an even steeper decline, dropping 2.95% to close at 20,826.35 points.

In currency markets, sterling was last up 0.75% on the dollar to trade at $1.2835, but it slipped 0.36% against the euro closing at €1.1762.

In the space of barely two days, markets have gone from looking forward to a Fed rate cut in a growing economy to fretting about an impending recession.

Retail footfall across the UK declined last month, continuing a downward trend amid ongoing economic uncertainty during the election period. Data from the British Retail Consortium showed a 3.3% year-on-year drop in July, a deeper fall than June's 2.3% decrease.

Despite the overall decline, high streets bucked the trend with a surprising 2.7% increase in footfall compared to last year, marking a significant recovery from the 3.1% drop in June. In contrast, retail parks and shopping centres continued to struggle, with footfall down 0.8% and 3.9%, respectively.

All UK nations saw reduced footfall, with England experiencing the largest decline at 3.4%.

In Europe the STOXX Europe 600 Index ended the week 2.92% lower as global markets were roiled by Friday’s weak US economic data that sparked worries about growth. Major stock indices also fell. Germany’s DAX was hit the worst falling 4.11%, France’s CAC 40 Index dropped 3.54%, and Italy’s FTSE MIB lost 5.30%. Over the week the UK’s FTSE 100 Index also declined 1.34% despite the welcome rate cut.

UK gilt yields fell as the Bank of England (BoE) lowered borrowing costs for the first time in four years. German bund yields also decreased as the market priced in the possibility of more rate cuts from the European Central Bank later this year.

An initial estimate showed that annual inflation in the eurozone picked up to 2.6% in July from the 2.5% registered in June. A consensus estimate had called for inflation to decelerate to 2.4%. Nevertheless, services inflation eased for the first time in three months. Year-over-year changes in consumer prices varied across countries, with inflation easing in Spain but rising faster in Germany, France, and Italy.

The region’s economy in the second quarter expanded a faster-than-expected 0.3% sequentially (0.6% on a year-over-year basis), led by growth in France, Italy, and Spain. However, Germany’s economy contracted, counter to expectations.

Meanwhile, the unemployment rate ticked up to 6.5% in June from an all-time low of 6.4% in May. Still, the European Commission’s consumer confidence indicator for the euro area increased in July and has improved steadily since February amid optimism that borrowing costs would decline.

In the US the recent rotation toward value stocks and small-caps stalled, at least in part, as the small-cap Russell 2000 Index pulled back sharply at the end of the week. Notably, however, an equal-weighted version of the large-cap S&P 500 Index held up better than its more familiar, market-weighted counterpart, suggesting that the market’s performance continued to broaden away from the so-called Magnificent Seven and other technology-oriented market giants. Relatedly, the Nasdaq Composite pulled back over 10% from its July high, putting it in a technical correction.

Companies representing nearly 40% of the S&P 500’s market capitalization reported second-quarter earnings during the week, including four of the Magnificent Seven—Microsoft, Meta Platforms (Facebook), Apple, and Amazon.com. While results varied relative to consensus expectations, a common theme appeared to be expectations for heavy capital spending to build out artificial intelligence (AI) capabilities.

Amazon.com shares fell over 11% in early trading Friday following the previous evening’s report and earnings call, which revealed that the company had capital expenditures of over USD 30 billion in the first half of the year—a figure expected to grow in the second half—partly to support AI demands on its cloud computing division, AWS. Microsoft announced that it spent USD 19 billion in the second quarter alone and expected outlays to pick up later in the year, while Meta estimated that it would spend roughly USD 37 billion–USD 40 billion in the second half. Alphabet previously estimated that it would spend roughly USD 24 billion over the same period.

In Asia Japan’s stock markets suffered heavy losses, with the Nikkei 225 Index falling 4.7% and the broader TOPIX Index down 6.0%. On the final day of the week, with disappointing U.S. macroeconomic data dampening investor risk appetite, the absolute drop in the Nikkei was among the biggest in the index’s history, comparable to its one-day plunges in March 2020 when the coronavirus pandemic struck and during the “Black Monday” global stock market crash in October 1987.

Meanwhile, a rebounding yen continued to hamper the earnings outlooks for Japan’s export-oriented companies. The yen strengthened to around JPY 148.9 against the U.S. dollar from about 153.7 at the end of the previous week. Within fixed income, the yield on the 10-year Japanese government bond (JGB) fell to 0.98% from the prior week’s 1.06%.

Chinese equities were mixed after weak manufacturing data tempered investor sentiment. The Shanghai Composite Index gained 0.5% while the blue chip CSI 300 lost 0.73%. In Hong Kong, the benchmark Hang Seng Index declined 0.45%, according to FactSet.

The official manufacturing Purchasing Managers’ Index (PMI) slipped to 49.4 in July from 49.5 in June, marking the third consecutive monthly contraction as production and new orders declined, according to the National Bureau of Statistics. The gauge remained below the 50-mark threshold separating growth from contraction. The nonmanufacturing PMI, which measures construction and services activity, slipped to 50.2 from 50.5 in June, as expected. In a statement following the release, officials attributed the declines to seasonal factors and extreme weather events in some cities in China.

The Week Ahead

After a busy period of blue-chip interims, with nearly every company in the FTSE 100 having reported, attention will now turn to some of the mid-cap companies.

While FTSE 250 reporting will dominate proceedings, there are a few stragglers from the FTSE 100 still set to issue their interims.

Included in this list is insurance giant Legal and General, with investors in the firm hopeful that the latest Bank of England interest rate decision will prove beneficial going forward.

Next week brings earnings from industrial bellwether Caterpillar and media and entertainment giant Walt Disney which will give more insight into the health of the consumer and manufacturing, as well as reports from healthcare heavyweights such as weight-loss drugmaker Eli Lilly.

ISM services is a key event from the US next week. We have some second-tier data from the APAC region such as the RBA meeting, NZ inflation expectations and China PMIs, but nothing that is likely to move markets to the same degree as the last two weeks. And that means appetite for risk might be the main driver for markets next week. But given the larger moves already seen, we may need to lower out expectations for volatility unless a fresh catalyst arrives.

After profiting from the 'rotation trade' as of late as money has left tech and entered 'value' markets, many of our active strategies will be satisfied with the tech sell off this week despite it dragging other markets down.

A large proportion of the move was captured this week and profits taken, as well as buying some 'value' stocks as markets fell.

It will be interesting to see how the next couple of weeks evolves but it's been a satisfying last few weeks. Long may it continue.

Have a good week in the market.

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