Europe

After an initially positive start, markets in Europe have pulled back from their intraday highs, with the FTSE100 slipping below 7,000, to a six-week low.

It’s not completely clear what appears to have triggered the change of sentiment, however a bond market selloff hasn’t helped, which has sent UK 5-year gilt yields to their highest levels since March 2020, and 10-year yields to a four-month high. It could be the recent headlines around new fiscal rules from the Chancellor of the Exchequer is exerting upward pressure on short term UK borrowing costs.

German bund yields have also pushed higher to their highest levels in two months. The weakness in the DAX could also be as a consequence of a rebalancing of the index to forty companies on Monday next week, with the index looking set to close at its lowest level in two months.

While we’ve seen an afternoon sell off, with basic resources and industrials getting hit the hardest, some sectors have managed to outperform with the travel and leisure sector leading the gainers.

Airlines have seen further gains today on hopes that the UK government is set to simplify the classifications on the travel restriction list to a binary choice between green and red, halving the red list in the process, and opening up a whole range of new countries that will be open to overseas travel. IAG has seen another positive day, posting its best percentage 2-day gain since July. easyJet TUI, Jet2 have also jumped on the bandwagon.

Rolls Royce is also up for the second day in a row, on a combination of optimism over the recent AUKUS submarine deal, and that it will reap the benefit of a relaxation of air travel restrictions, as engine flying hours go up.

Banks are also outperforming as yields rise with HSBC leading the way.      

Continued falls in iron ore prices, which has seen them drop below $100 a ton, and to their lowest levels this year has served to undermine the basic resource sector, with the likes of Anglo American, Rio Tinto and BHP all down sharply as Chinese steel production volumes fell to a 17-month low in August. The crackdown on the real estate sector isn’t helping demand either.     

US

It’s been a lacklustre open for US markets, with stocks leaking lower as US 10-year yields hit their highest levels in two months ahead of next week's Fed meeting.

The latest University of Michigan Sentiment survey for September saw a slight improvement in August, however it was below expectations, with the overall tone being somewhat negative, over concerns about the delta variant, rising prices and slower economic activity.

As in Europe, travel and leisure stocks are outperforming with Carnival, Norwegian and Royal Caribbean, all doing well along with Expedia Group.

Manchester United shares have dropped sharply after reporting a loss of £33.7m for Q4. Revenues were better, helped in part by the fact that supporters are back in stadiums with revenues up 15% to £94m.

Invesco, having only just completed its merger with Oppenheimer, is now said to be in talks to merge with State Street’s asset management division, with its shares up about 5%.

Basic resources company Freeport McMorran is amongst the worst performers.

FX

The pound is slightly softer on the week after today’s weak August retail sales numbers, which showed a decline of -0.9%. coming on top of a revised -2.8% decline in July. The numbers have raised the inevitable questions about the demise of the UK consumer, however what the numbers don’t show is that credit card spending in August surged with spending at restaurants, cinemas and outdoor events showing a big rise. This sort of retail activity tends to show up in the index of services part of GDP, and not in retail sales, so while recent consumer activity looks lacklustre, it doesn’t always reflect what is going on when looking at consumer spending patterns.

The rise in yields has pushed the US dollar to its highest level this month, ahead of next week’s Federal Reserve rate meeting.

Commodities

Gold prices have slid back for the second week in succession, as rising US treasury yields and a stronger US dollar push it to levels last seen when it flashed crashed just over a month ago.

Crude oil prices have slipped back today, but are still on course for their fourth successive weekly gain, as some of the heat of the recent rally gets tempered by a stronger US dollar. The gradual return of US production after the recent storms is taking some of the froth off prices, and while it may take a little longer to restart production, more supply should eventually return.

The slide in iron ore prices to below $100 a ton has continued today, although on the flip side of that nickel prices are near seven-year highs, while copper prices are flat.

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