Risk aversion takes hold as online outage hits markets

Risk aversion is taking hold yet again on Friday, with news that a global internet outage including banks, airports, train companies, TV stations including Sky News, stock exchanges including the LSE, Microsoft’s cloud services and cyber security services have all been hit by major online outages. Stocks are broadly lower on Friday, and we expect this outage to hurt the big tech companies who are also affected, Microsoft’s share price is down some 1.9% in pre-market trading. This comes at a delicate time for markets, when they are worried about political discord in the US, a protectionist second term for President Trump, and a slowing developed world economy.

At this stage, we do not know how long the outage will last and the cause is unknown. It is hard to see risk managing to stage a meaningful recovery in Europe or in the US until this has been resolved. The yen picked up at the start of the European session, although gold remains close to session lows. The FTSE 100 is also lower across the board on Friday and every sector is under pressure. The weakest performers are materials, real estate and financials. Real estate and financials have been hit hard by the global internet outage and may remain under pressure until the problem is resolved and we know what is behind this attack.

UK economy gets double dose of bad news for June

There was bad news to start the day for the UK economy.  Retail sales for June were dismal and public sector finances were a lot worse than expected, with public sector borrowing at £13.6bn vs. £10.5bn expected. If the Labour government doesn’t want to play hard and fast with the UK’s fiscal position, then they need to find a way to fill the coffers quicky. The ONS are reporting that sales volumes fell 1.2% last month, which follows on from the 2.9% rise in sales in May. The decline in sales was widespread, with all sectors experiencing declines, except fuel. Department stores and household goods stores were the worst hit, with department stores seeing a 3.4% decline in YoY sales last month. Even online sales fell by 1.1%.  Election uncertainty and bad weather effected footfall and thus sales, which is why department stores were particularly badly affected. Food sales also fell by 1.1%, which is a sign that consumers are getting cautious with their spending as we continue to wait for a BOE rate cut.

There has been no discernible trend in retail sales this year, with the increasingly wet weather hurting sales for the first half of this year. We will have to see if better weather in July, England reaching the finals of the Euros and the eradication of election uncertainty enticed shoppers to spend in July. For now, the outlook for the UK consumer looks mixed, on the one hand inflation looks contained and wage growth remains elevated, however, the prospect of rate cuts is still some way off. The swaps market is currently pricing in less than 50% chance of a rate cut at the BOE’s meeting on 1st August.

Is the mid-cap catch up rally over?

Regarding themes in markets, there was hope that the global rally in stock markets was broadening out, in recent weeks we have seen mid-cap indices outperform blue chip indices in the US and the UK. However, that trend is on pause. Risks have emerged that could derail a broader rally, for example, slowing growth, US initial jobless claims rose at their fastest weekly pace since May and are now at their highest level since 2021, suggesting that the US jobs market is returning to pre pandemic norms. If we see a slowdown in the jobs market and if there is a feeling that the Federal Reserve is behind the curve when it comes to rate cuts, then it is hard to see how mid-caps can sustain a catch-up rally vs. the mega cap US tech stocks. In the UK, the mid-cap FTSE 250 index has already underperformed the FTSE 100 this week, proving that it is no match for the energy and financial heavy weights in the blue-chip UK index. In the US, the Dow Jones is up by 2.29% this week, vs. a 2.25% decline for the Nasdaq. However, on Thursday, the Dow sold off sharply and was lower by 1.29%, vs. a 0.7% loss for the Nasdaq. We expect to see similar price action on Friday, however, the mega cap tech stocks are also weighing on US markets in pre-market trading, so this could be a sell-everything day. Thus, for now, the mid-cap catch up trade is on ice, as stock markets sell off broadly. More than 90% of the UK index is lower on Friday and the Eurostoxx 50 index only has 3 advancers so far.

When safe havens don’t work like they used to

In the FX space, the dollar is broadly higher, as it attracts safe haven flows, even though US treasuries are not attracting safe haven flows. This may be a reaction to Donald Trump’s speech at the Republican National Congress on Thursday evening. He pledged tax cuts and trade wars as he doubled down on his America First agenda. His trade wars during his first term of office unsettled financial markets, and now that he has a large lead in nearly all of the major pre-election polls, the fear is that Trump 2.0 could be more potent than his first term. The fear for investors is that Trump’s tax cuts could exacerbate the US’s already enormous deficit, which is nearly 7% of GDP. This could limit any downside in US bond yields. Thus, in this time of geopolitical tumult, including today’s global online outage, financial market safe havens are not working as they once did.