Market snapshot: new record and a motor merger mulled

The traditional Dow Jones index broke a record of a different kind as investors sought growth elsewhere.

Having hit a level of 45,000 earlier this month, the index has since drifted and yesterday’s decline marks a nine-day losing streak for the first time since 1978. Given the prospect of interest rates staying higher for longer given the economic backdrop, cyclical stocks such as car makers and retailers have suffered, with some rotation into the seemingly unassailable technology sector.

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One strange by-product of the fall has been reflected in the shares of NVIDIA Corp (NASDAQ:NVDA). Since joining the Dow Jones, and potentially caught in the crossfire of index selling, Nvidia shares have fallen by more than 10% since their record high, although they remain up by more than 170% in the year to date.

In anticipation of the Federal Reserve interest rate decision later, a surprising new concern has emerged. Following a retail sales release which revealed growth of 0.7% against an expected 0.6%, driven largely by an increase of 2.4% in car and motor parts sales, some investors are now questioning whether a rate cut is required at all, despite the almost unanimous feeling that a reduction will be announced. The ongoing resilience of the economy has long since erased any talk of recession as feared earlier in the year and, in any event, at some point the Fed may wish to keep its powder dry ahead of what could be an inflationary year to come.

Despite the Dow’s current downward trend, the index remains ahead by 15.3% so far this year, in what is looking increasingly likely to have been a highly successful period for investors. Of course, even stronger gains have been achieved elsewhere, with the S&P 500 having added 27% and the Nasdaq 34%, both remaining near record high levels.

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Asian markets were mixed overnight, with Japan taking centre stage from what has been a largely Chinese-based focus of late. The Nikkei slipped slightly after reporting strong export gains and import declines, with the Bank of Japan expected to hold rates later in the week. However, the real news was in the corporate world, where there were reports of a possible merger between Nissan Motor and Honda Motor Co Ltd ADR (NYSE:HMC), leading to a temporary suspension in Nissan shares following a 22% surge. In reaction to the speculation, the companies issued a statement confirming that they were discussing closer collaboration but that nothing had yet been decided or agreed.

If yesterday’s wage growth numbers were not enough, the reported rise in UK inflation this morning – while expected – surely seals the deal on a no-change decision from the Bank of England tomorrow. Inflation rose by 2.6% in November from 2.3% the previous month, and the core number which excludes the likes of food and energy prices, increased from 3.3% to 3.5%. The clear challenge of removing the last vestiges of inflationary pressure before the 2% target can be achieved should be sufficient to keep the central bank sitting on its hands for this month, despite the clear lack of sparkle across the economy as a whole.

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The lack of likely monetary stimulus in the UK has weighed on the more domestically focused FTSE 250 index of late and, after a bruising session yesterday, the gains for the year have been reduced to 4.5%. The current level marks a decline of nearly 5% from a peak achieved this year at the end of July, despite a notable increase in M&A activity, which has tended to be more focused on this part of the market.

Meanwhile, the primary index opened slightly higher after the lacklustre performance of the last few days. British Airways owner International Consolidated Airlines Group SA (LSE:IAG) took early flight after a broker upgrade, and the shares have now risen by 95% this year alone, apparently not having dimmed investor enthusiasm.  The group’s performance has been one of strong recovery, latterly boosted by the surprise announcement of a €350 million share buyback programme in November. The marginal gain leaves the FTSE 100 up by 6.2% so far this year, in stark contrast to many of its global peers and despite the clearly undemanding valuations which many of its constituents offer.