US recession fears trigger global market sell-off, Japanese stocks among the biggest losers and British Airways owner International Consolidated Airlines brings back dividends

“So much for the big equity rally when interest rate cuts take centre stage,” says Russ Mould, Investment Director at AJ Bell.

“Investors thought rates cuts – which have just happened in the UK and looked poised to take place next month in the US – would energise stock markets. The opposite has happened with a bad day on Thursday and weakness extending into Friday, meaning August is so far off to a bad start.

“Weak economic data from the US spooked the market and reminded investors there are negative reasons why central banks might cut rates, not simply lowering the cost of borrowing because the rate of inflation is easing.

“An economy going through a bad patch is one catalyst for a central bank to cut rates and hopefully stimulate activity. This thought process is likely to be at the top of the agenda for the Fed this week after shocking US economic data that featured bigger than expected jobless claims and contraction in manufacturing. The narrative has changed from rate cuts equating to good news to rate cuts meaning measures to avoid recession.

“Investors have been on the edge of their seats in recent weeks, taking profits in some of the previously strongest areas of the market like tech and redeploying the proceeds into value stocks that offer slower growth but at a much cheaper price. Wednesday’s rebound in the tech sector looks to have been a false dawn as the big names have reversed once again.

“Nvidia had a terrible session on Thursday and has fallen further in pre-market trading on Friday. Amazon did the same, depressed by a negative market reaction to its latest results. Even Apple beating earnings forecasts for the sixth quarter in a row wasn’t enough to drive a big wave of buyers in its stock, with the shares treading water in after-hours trading following its latest results. This implies growing nervousness among investors and a drop in risk appetite.

“The prospect of the US experiencing an economic slump has far-reaching consequences, which is why stock markets were weak around the world on Friday. This included an approximate 6% slump in Japan’s Nikkei 225 and Topix indices. Financials, basic materials and industrials were among the worst hit sectors in Japan.

“This is a significant reversal of fortunes for the country which had, up until recently, been one of the strongest performing markets this year.

“The list of worry points for the market is growing. On top of geopolitical tensions between the West and China, ongoing Middle East violence and the US presidential election, we’ve now got recession fears and that will stoke debate over whether the Fed has acted too late with cutting interest rates.”

International Consolidated Airlines (British Airways)

“Against a backdrop of airlines slashing prices to fill planes and negative investor sentiment towards the sector, International Consolidated Airlines has issued a remarkably upbeat set of results.

“Strong travel demand over the past few years has enabled the airline to pay down debt and get its finances in order after a traumatic pandemic. The balance sheet is now deemed strong enough to warrant recommencing dividends, something that investors will welcome with open arms.

“Paying dividends also signals a big step forward for the company and effectively draws a line under previous fears about its financial strength. In essence, recommencing the dividend means the narrative can shift to how the business is growing, not simply how it is repairing previous damage.

“Walking away from a proposed takeover of Air Europa also shows the company has discipline and isn’t prepared to spend a long time fighting antitrust regulators to get the deal over the line. Management has clearly decided its time is better spent elsewhere and to just move on. Investors often like companies that take decisive action.

“While the likes of Jet2 and EasyJet are heavily dependent on people flying off for their summer holidays, International Consolidated Airlines has a much wider range of customers as it has a mixture of short and long-haul destinations. That broadens its opportunities to make money.

“Like many of its rivals, International Consolidated Airlines is upgrading its fleet to have more energy and cost-efficient aircraft and greater overall capacity. Being more efficient on the ground is also of paramount importance, with a lot of work going into better operating systems and processes.”

These articles are for information purposes only and are not a personal recommendation or advice.