Today’s markets: China demand hits London shares

Shares were flat in Europe this morning and lacking meaningful direction, though both Paris and Frankfurt are trading close to all-time highs struck earlier in the month. The FTSE 100 is holding onto the 7,700 handle. The US reopens after a holiday with the S&P 500 a little below the 5,000 mark. London is being affected by declining metal prices following the reopening of markets in China. Iron ore futures skidded lower amid demand worries as China delivered the largest ever cut to its benchmark mortgage rate.

The People’s Bank of China’s 25-basis point cut to the five-year loan prime rate was the biggest since the benchmark was introduced in 2019 and it shows Beijing is concerned. Equities in mainland China and Hong Kong fell at first before rallying towards the end of the Asian session.

Barclays shares rallied 6 per cent on a positive market reaction to its strategy overhaul. Profits were down 6 per cent in line with forecasts. It took almost a £1bn restructuring hit and bad loans rose to £1.9bn from £1.2bn. But investors cheered plans to return £10bn to shareholders over the next three years via buybacks and dividends. 

When you trade at such a discount to book value, this makes sense. The plan places a lot of emphasis on cost cutting with management aiming to reduce expenses to 63 per cent from 67 per cent on a cost-to-income basis. It wants to drive this down to the high 50s by 2026, when it expects its return on tangible equity to have risen to more than 12 per cent from 10 per cent today. It seems to be that people think this is a good plan but the question is one of execution given the reliance on growth. More on that here

JPMorgan isn’t so bullish on the US market. “Our central case remains that equity upside is limited from here, constrained by the fact that investors’ equity allocation globally is approaching the post-Lehman high seen in early 2015.” Retailers Walmart and Home Depot provide some steer for the broader market in terms of the US consumer. Data is otherwise quite light again.

The Trader is written by Neil Wilson, chief market analyst at Finalto