Markets set to open steady as Biden bows out

The past week has seen a general cooling in US markets as the Nasdaq index continues to correct itself. The Vix fear indexes have all been climbing in the past week, but to be fair, not in a way that suggests panic yet. According to Bank of America Global Research, there have been recent strong flows into equities, and US small-cap funds see the second largest inflows ever. In contrast to what they have been doing for most of the year, retail investor equity purchases picked up momentum in recent days, driven by ETF buying. There used to be an adage from the stock market days: the retail investor is the last one in and the last one out. The weekly AAII retail sentiment index indicates retail investors are bullish, over 50% expect the market to be higher than it is today in 6 months.

So, I guess the week’s big news stories all happened towards the end of the week. Firstly, the IT outage as a cyber security software upgrade disrupted industries across the globe. Airlines, in particular, seemed affected. The FT headlines that this software update that went wrong turned into a global crisis feel a little strong as less than 1% of those who use Windows 10 were impacted. Paper headlines that the internet has crashed were a massive exaggeration. CrowdStrike was founded in 2011 and is now a £54 billion market cap company with revenues of £3bn; what a meteoric rise. Shares fell 10% on Friday.

Then came the news that the government is considering giving some public sector workers a 5.5% pay increase, which could potentially have implications for Mr Bailey. If the Bank of England will start to concern themselves that public sector pay awards materially above the current inflation rate are likely to be the norm, then cutting interest rates is a more challenging decision. The bond market will also not like it as the possibility of the government having to borrow more increases.

Lastly, the stepping down of Mr Biden, announced late last night and the proposed replacement of Kamala Harris as the Democrat’s nomination for President. This probably does not change, initially, at least, the odds of a Trump victory; it will also be interesting to see who she chooses as her running mate. At present, the bookie’s favourite is Josh Shapiro.

On the macro front, there are further signs that the US job market is weakening, as initial jobless claims rose strongly. Jobless claims have increased for most of the year, further enhancing the possibility of a September rate cut. Earnings season has barely started, but with just over 10% of the S&P 500 reporting, signs are encouraging but appear to be often discounted by investors.

To the week ahead, briefly, markets seem largely unaffected by the Biden news this morning; earnings reports will come in thick and fast this week, with too many household names to list from all industries. The Bank of China unexpectedly cut a key interest rate today, which did little to stimulate domestic share prices overnight. On the macro front, flash PMIs will be of note around the globe; the UK index is expected to remain above 50, indicating expansion. As oil prices drift lower, we get the monthly US oil production data. We get a raft of US employment data, US quarterly GDP estimates, and Durable goods orders, all further indications of the state of the US economy. As for the UK, we get the monthly CBI business optimism index, which has increased in the past few months.