Euro Struggles Amid German Election Results and Fed Focus

The euro remains under pressure following wins by far-right parties in German state elections, trading near $1.1050. Asian markets showed mixed PMI results, with China's Caixin index slightly above forecasts, while Japanese shares slipped despite improved business investment. Investors are focused on the upcoming US payrolls report, which could influence the Fed's rate cut decision.

Equities

The FTSE 100 reached a three-month high on Friday, driven by hopes of interest rate cuts, despite some weakness in energy shares. The index ended the day flat but logged its second consecutive monthly gain and third weekly advance. Real estate shares led the day's gains, with real estate investment trusts up 1.6% and broader real estate shares rising 1.5%. The oil and gas sector was the worst performer, slipping 1.1% due to demand concerns and potential increased supply from OPEC+. Precious metal miners also fell by 1.1% as gold prices softened amid a stronger US dollar and firmer Treasury yields. Anglo American’s shares declined by 1.3% after the company signed agreements with Chinese fertiliser firms to develop the market for polyhalite fertiliser products in China, even as it slowed development at its northern England mine.

Turning to the US, a broadening rally in stocks provided an encouraging signal to investors concerned about the concentration in technology shares. The S&P 500 has gained 18.4% year-to-date, largely driven by major tech companies like Nvidia and Apple. However, recent market movements have seen investors increasingly allocating funds to value stocks and small caps, which are expected to benefit from anticipated Federal Reserve rate cuts. The equal-weight S&P 500 index, reflecting the average stock, hit a new record this week and is up around 10.5% year-to-date, narrowing its performance gap with the broader S&P 500.

Tech stocks, particularly those within the Magnificent Seven, have underperformed the rest of the S&P 500 since mid-July. Nvidia’s forecast earlier this week fell short of investor expectations, yet stocks held up, suggesting investors may be looking beyond tech. Despite this, technology remains a significant driver of growth, with third-quarter earnings for the sector expected to rise by 15.3% compared to a 7.5% gain for the S&P 500 overall. Among value stocks, General Electric and Targa Resources have shown strong performances this year, up 70% and 68%, respectively.

Forex & Commodities

The US dollar climbed to a two-week high against the euro, buoyed by reduced expectations of aggressive policy easing by the Federal Reserve. The dollar strengthened to 101.79 against a basket of six major currencies, its highest level since 20 August. It also reached 146.60 yen before retreating slightly. This movement comes as long-term US Treasury yields rose, reflecting steady inflation and diminishing the likelihood of a larger interest rate cut by the Fed.

In contrast, the euro eased to $1.1042, its lowest since 19 August, while sterling held steady at $1.31255, close to its weakest point since late August. The market's focus is now on the upcoming US non-farm payrolls report, with expectations of 165,000 jobs added in August, which could influence the Fed's decision on interest rates.

Gold prices fell by 1%, with spot gold at $2,497.53 per ounce, after US inflation data met expectations. Despite the decline, gold posted a 2% gain for August. Meanwhile, palladium retreated 1.7% to $963.34 but gained 4.3% over the month. The inflation report has kept the possibility of a rate cut in play for September, though the extent of the cut remains uncertain.

In the energy market, the oil sector faced pressure as demand concerns weighed on crude prices, with the sector underperforming.