Market snapshot: a turnaround and now more turmoil

US stocks staged a major turnaround despite an extremely hot jobs report, although subsequent events in the Middle East are likely to dampen sentiment.

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The non-farm payrolls figure of 336,000 jobs having been added compares to a figure of 187,000 in August, and was well in excess of the consensus forecast of 170,000. The immediate reaction from the market was a sharp dip, as the “higher for longer” narrative moved to the forefront once more, with the possibility of a final Federal Reserve interest rate hike in November seemingly becoming more possible.

However, the Dow Jones posted a swing of over 500 points to finish the day almost 300 points higher, as investors continued to digest the implications of the release. There was no clear catalyst for the turnaround in sentiment, although a slight slowdown in wage growth and the nature of the jobs added, the majority of which were at the lower end of the pay scale, kept the door ajar for a soft landing which the Fed has been trying to engineer for some months.

Even so, the pressure looks likely to remain given the seemingly relentless economic growth in the US, and further clues are due this week with the release of consumer price inflation and producer price index readings.

At the same time, the third-quarter earnings season kicks off with updates from the likes of JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC), which should provide an additional dimension in covering what is happening on the ground. Of equal interest will be the outlook comments from the banks in particular, which could provide guidance on the strength of the consumer and whether there is any notable increase in loan defaults.

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The late surge in markets pushed the Dow Jones back to positive territory for the year, with the index now ahead by a marginal 0.8%. Growth stocks were subject to particular buying interest, especially mega cap technology, with the S&P500 and Nasdaq regaining some of their previous firm footing to stand ahead by 12% and 28% respectively this year.

However, the outlook came under immediate pressure following military conflict in the Middle East over the weekend. Destabilisation in the region could yet spread depending on any escalation in hostilities over the coming days, which immediately drove the oil price higher by almost 4%. At the same time, such geopolitical tension is traditionally and unsurprisingly negative on sentiment, with investors likely to be unsettled by the prospect of further uncertainty.

Against this backdrop, the FTSE100 saw the benefit of its defensive, established constituents providing something of a haven compared to its European counterparts and opened marginally higher. The likes of BP (LSE:BP.) and Shell (LSE:SHEL) were inevitably marked up given the oil price spike, while BAE Systems (LSE:BA.) also popped higher in the wake of the Middle Eastern turmoil.

Conversely, the airlines were marked sharply lower given the possibility of travel disruption, including International Consolidated Airlines Group SA (LSE:IAG) which was hit by the additional burden of a broker downgrade and fell by more than 5%.

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Even so, any strength could be short-lived, while sentiment remains noticeably fragile and the FTSE100 is now ahead by just 0.8% in the year to date. It now remains to be seen how this important week unfolds, with any or all of the geopolitical, economic and corporate developments carrying the potential to upset the investing applecart.