In a strong finish to the week, the FTSE 100 rose 26.16 points, or 0.3%, closing at 10,679.03. This upward movement coincided with the DAX 40 in Frankfurt achieving an all-time high of 25,826.78, signalling a broader positive sentiment in European markets as concerns regarding potential US interest rate hikes abate.
Market Overview
The FTSE 100’s gain this week marked a 1.6% increase overall, complemented by a 1.7% rise in the FTSE 250, which closed up 121.22 points at 23,538.80. Meanwhile, the AIM All-Share experienced a slight decline, down 1.36 points to 776.09. In continental Europe, the CAC 40 in Paris also saw a gain of 0.4%, highlighting a broader trend of positivity in the equity markets.
Kathleen Brooks, research director at XTB, noted that “a mixture of relief post the payrolls data, a reversal of the sell-off in the chip stocks, and more volatility in the yen are the main narratives today.” She highlighted that the recent weak US jobs figures have diminished expectations for interest rate increases, a change that tends to favour growth stocks by lowering borrowing costs and enhancing the present value of future earnings.
Diminished Rate Hike Projections
According to the CME’s Fedwatch tool, the likelihood of a US rate increase in July has plummeted from 40% to just 17%. Additionally, the odds of a rate hike by December have dropped below 50%, down from an earlier 50% expectation for two hikes by year-end. This shift in sentiment has sparked optimism among investors, particularly for growth sectors that benefit from lower interest rates.
As the markets adjusted, the euro weakened slightly against the dollar, trading at 1.1440 on Friday, down from 1.1449 the previous day. The dollar also appreciated against the yen, reaching 161.30 yen, while the pound traded at 1.3351 dollars, a decrease from 1.3367.
UK Economic Indicators
On the domestic front, UK services activity contracted sharply in June, with the S&P Global’s final services PMI dropping to 48.8, signalling the steepest decline in nearly three and a half years. This downturn is attributed to weak demand, rising costs, and geopolitical uncertainties. The combined services and manufacturing output index also fell to 49.3, underscoring the challenging economic environment.
The Bank of England’s latest Decision Making Panel revealed that businesses expect their own price growth to remain steady at 4%, slightly above pre-war levels, while expectations for broader consumer price inflation have decreased from 3.7% to 3.3%, influenced by recent drops in energy prices.
Sector Highlights and Notable Moves
In commodities, Brent crude saw an increase, trading at $71.76 per barrel, up from $70.76, while gold prices rose to $4,167.57 an ounce, benefiting from the soft US job data and shifting rate expectations. Dan Coatsworth, head of markets at AJ Bell, explained that the decline in US Treasury yields has made gold more attractive to investors, leading to its recent rebound.
On the corporate front, Pearson experienced a decline of 1.4% after announcing a delay in the release of this year’s SATs examination results due to technical issues, pushing the publication date from July 7 to July 16. Education Secretary Bridget Phillipson expressed frustration over the delay, highlighting the need for reliable results for schools and students.
Conversely, Johnson Matthey’s shares surged by 5.0% as it anticipates completing the sale of its Catalyst Technologies business to Honeywell International by the end of August, following regulatory approval. Close Brothers also saw a notable increase of 7.9%, as analysts upgraded their rating on the stock amid ongoing uncertainties in motor finance.
Why it Matters
The current market dynamics reflect a delicate balance between growth expectations and economic realities. As investors recalibrate their strategies in response to shifting interest rate projections, the implications for both UK and European markets are profound. With key indicators suggesting a cooling economy alongside positive corporate developments, the coming weeks will be critical for determining the sustainability of this upward momentum in equity markets. The interplay of domestic challenges and global trends will shape investor sentiment as we move further into the year.
