The FTSE 100 turned from red to green as US markets opened higher today, despite the looming threat of escalating US-China tensions.
Britain’s main stock index had fallen 0.78 per cent by 10.30am to 6,017 points. By 2.50pm it had risen 0.2 per cent to 6,078 points, however, as US markets shrugged off more jobless claims.
Today’s drop comes after a volatile week for the FTSE 100, which saw it leap four per cent on Monday on hopes of a vaccine, drop on Tuesday as those hopes faded while optimism over more stimulus pushed it up by yesterday’s close.
However, the FTSE 100 and European stocks initially fell today after President Donald Trump launched a Twitter blast against China overnight.
Trump-China tensions loom over markets
“China is on a massive disinformation campaign because they are desperate to have Sleepy Joe Biden win the presidential race so they can continue to rip-off the United States, as they have done for decades, until I came along!” Trump tweeted.
Trump suggested President Xi Jinping was behind coronavirus propaganda, saying “it all comes from the top”.
And earlier this week the Senate voted overwhelmingly for a bill that could stop Chinese corporate giants like Alibaba listing on US markets.
That spooked investors who fear more tariffs after the US and China struck what they called a “phase one” deal to end their trade war in January.
Pierre Veyret, a technical analyst at Activ Trades, said the tensions could seriously harm the superpowers’ tentative steps to end their trade war.
“This poses a serious problem to investors as these rising tensions combined with the virus crisis may put the recent Washington-Beijing Phase One deal at risk, making stock markets even harder to predict,” Veyret warned. “Investors will keep their focus on data today with several significant releases from both the US and the UK.”
Trump eyes ‘new Cold War’ in China dispute
Craig Erlam, senior market analyst at online forex trader Oanda, said the “incredible rebound” in stocks since March “has undoubtedly stalled this month”.
“The prospect of economies reopening and returning to something that resembles normal has, at times, been very positive for markets,” he said.
But he pointed to setbacks for the FTSE 100 and other indexes as countries navigate tricky exits from lockdown, increasing fears of a big second wave of infections.
“On top of that, tensions between the US and China have increased dramatically which is making investors nervous,” he said. The consequences of that for global trade could be stark in the current atmosphere.
“The prospect of relations turning south and possibly killing the painfully negotiated trade deal and even leading to new tariffs is a dreadful thought given the state of the global economy,” Erlam warned.
“I think we’re probably heading for more of a cold war scenario, with Trump and his team being particularly critical of the Chinese in the run up to the election in November. The last thing he needs is the finger of blame for the number of deaths in the US being pointed his way when the economy is in such a perilous position. He’ll do whatever it takes to ensure this doesn’t happen.”
US 10-year bond yields fell as prices rose, a traditional sign that investors are losing their appetite for risk.
UK economy staggers in May
Meanwhile, IHS Markit’s flash PMI reading for May showed a second month of sharp contraction for the UK economy amid lockdown.
The very slight recovery evident in May’s flash UK PMI data, as construction workers returned to building sites, failed to lift the FTSE 100 out of its malaise.
Economists aid the UK economy remained locked in a coronavirus downturn during May despite an easing of lockdown measures.
They warned that the May data “does not signal that the pathway is clear for an improvement in the manufacturing and services sectors”.
FTSE 100 in the dark over UK recovery
Chris Beauchamp, chief market analyst at online trader IG, said the data shed little light on how long the economy will take to recover.
“While the situation in Europe is improving, according to PMI data, markets are looking tired once again,” he said.
Calling volatility in European stocks and the FTSE 100 a “grinding contest of attrition between the bulls and bears”, he warned markets could contract sharply.
“In this environment, modest improvements compared to last month’s dire readings are unlikely to provide much fuel for further gains in stocks,” Beauchamp added.
“With so little data to go on, we are essentially still very much in the dark. Until lockdowns are fully ended the data tells us little apart from the fact that economies are operating at a fraction of their overall capacity, something that can be gleaned merely from going for a walk outside.”
While sterling received a slight bounce against the dollar on May’s economic data, the outlook remains poor for the UK economy, even with the FTSE 100 marginally up.
Experts warned the UK’s high infection rate and coronavirus death rate may prolong its recovery. And lay-offs continued at a dramatic rate despite the job retention scheme.
US stocks push higher despite jobless claims
US stocks appeared to bolster the FTSE 100 and European stocks after their 2.30pm open.
The Dow rose 0.27 per cent and the S&P 500 climbed 0.14 per cent, while the Nasdaq inched up 0.12 per cent.
They managed to stay green despite more carnage in the American jobs market.
Meanwhile US jobless claims surged again today, with 2.4m more Americans filing for unemployment in the past week.
That brings the total to 38.6m since the start of the US’ coronavirus lockdown nine weeks ago.
Glassdoor senior economist Daniel Zhao pointed out this huge surge has already surpassed the number of job losses that took place over 18 months’ of the financial crisis.
“In only nine weeks, unemployment claims made during the coronavirus crisis have already exceeded the 37m claims made over the entire 18 months of the Great Recession,” Zhao said.
“The coronavirus crisis continues to inflict swift and deep impacts on the labor market at a near unprecedented clip.”
Richard Flynn, UK managing director at Charles Schwab, added that while the rate of jobless claims is falling, states are struggling to process backlogs of claims.
“Investors should not be overly optimistic, when the true number of job losses may not be fully reflected in the data,” he added.
It has been a wild week for investors. On Monday, news that US drugmaker Moderna had seen positive results for its coronavirus vaccine lit a fire under stocks. The FTSE 100 shot up more than four per cent.
Yet doubts about the Moderna trial and an economic warning from the US Federal Reserve chair have cooled optimism, before Trump stoked US-China tensions overnight.