Weekly Market Commentary: European stocks end August at record high

Friday saw markets on both sides of the Atlantic close out the month of August in positive fashion. Buoying sentiment, the latest US inflation reading saw core (excluding energy and food) inflation from the US Personal Consumption Expenditures Index come in at +2.6% year-on-year in July, below +2.7% expected, while the 3-month annualised rate was just +1.7%. In local currency terms, the equal-weighted version of the US S&P500 equity index and the pan-European STOXX600 equity index both notched up new record highs. That is pretty remarkable really, given the hiatus that hit investors just a few weeks ago. Looking forward to the new month ahead, global equities have started September on the back foot, with relatively weak data out of China over the weekend unsettling investors there. Otherwise, today is expected to be quiet given US markets are closed on Monday for US Labour Day.

Looking forward to the week ahead, investors are likely to be focused on the latest read for the health of the US labour market, with non-farm payrolls for August due on Friday –  a rebound from the hurricane-weather-impacted July data is expected, and the consensus market estimate is looking for an increase of around 165,000 in job numbers for August, which would be above the 114,000 jobs added back in July. The data will be especially important for the US Federal Reserve (Fed), not least given its dual mandate focused on inflation and jobs – but arguably more so, with the Fed’s recent pivot to seemingly prioritise job stability now that inflation risks look to be heading on a sustainably lower path ahead.

Over the weekend, Germany saw state elections take place in the eastern states of Thuringia and Saxony, with preliminary results now in. In Thuringia, the far-right Alternative for Germany (AfD) party looks to have come first with 32.8% of the vote – that would be the first time that the party have come first in a German state election. Meanwhile in Saxony, the AfD were in second place on 30.6% of the vote, not far behind the centre-right Christian Democratic Union (CDU) on 31.9%. In both cases, the results were poor for all the three parties in the ruling government coalition, with Chancellor Scholz’s centre-left Social Democratic Party (SPD) scoring just 6.1% in Thuringia and 7.3% in Saxony.

Over the weekend, China saw another round of weak economic data, highlighting the challenges for policy makers. China’s official (National Bureau of Statistics of China) Purchasing Managers Index (PMI) for manufacturing in August fell for the fourth month in a row, coming in at 49.1, below the 50-mark that separates month-on-month contraction versus expansion, and missing consensus market estimates of 49.5. For the world’s second-biggest economy, China has been struggling with a prolonged and ongoing property downturn which is weighing on both consumers and businesses. Despite government efforts, including interest-rate cuts, to try to boost sentiment, things have yet to turn around, and the latest property data is far from encouraging. Regarding August data for the value of new-home sales from the 100 biggest real estate companies in China, this saw a fall of -26.8% from a year earlier, and worse than the -19.7% annual decline in July.