Market snapshot: conflict tensions resurface

Asian markets bore the brunt of the breaking news of a retaliatory attack on Iran by Israel, also sending Dow futures sharply lower and resulting in further spikes in gold and oil prices.

US markets will not have the opportunity to react directly to the developments until later, but the escalation will put pressure on the main indices, which were already lining up for a weekly drop.

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The Dow Jones managed a wafer-thin gain on Thursday, whereas the Nasdaq and S&P 500 continued on a downward trend which is eroding the heady gains made over recent months. In the year to date, the Dow has now added just 0.2%, the Nasdaq 3.9% and the S&P500 5% as interest rate concerns continue to weigh on investor sentiment.

The latest batch of economic releases provided little respite for those still anticipating two interest rate cuts this year, with the possibility of no cuts at all beginning to appear on the horizon.

Low jobless claims numbers and a sharp acceleration in manufacturing painted a picture of economic strength and, while home sales numbers declined, the drop was less than expected. The data adds credence to the Federal Reserve’s previous mantra of “higher for longer” on the basis that the economy is no immediate or obvious need of assistance. At the same time, consumer spending remains robust given a healthy employment and wages backdrop, which could complicate any attempts to drive inflation down to the intended target.

As such, and in order to maintain heightened valuation levels, attention has turned to the quarterly reporting season with high expectations for companies which are reporting. While still in its early days, the season has opened brightly with an estimated 70% of corporates having beaten expectations. By the same token, and as largely expected, the slightest weakness is being punished.

Netflix Inc (NASDAQ:NFLX) was the latest example, with its shares dropping by more than 4% in after-hours trading, despite having beaten revenue and profit estimates, adding 16% to its subscriber numbers in the process. However, the company also noted that it would stop reporting subscriber numbers next year, which was taken as a sign that the current strength of customer growth could now be peaking.

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Elsewhere, some minor cracks have begun to appear in the burgeoning world of AI, which has put additional pressure on some of the mega-cap technology stocks which have so far ridden the waves of exuberance. Apart from the possibility of rates remaining higher for the time being, reports this week from ASML Holding NV (EURONEXT:ASML) and Taiwan Semiconductor Manufacturing have disappointed on various levels, from a lack of capital spending to tepid new bookings, although both companies insist that the outlook for the sector remains highly exciting.

This glimmer of doubt was also evident in Asian markets, which were already reeling from the latest news from the Middle East, with the Nikkei in Japan falling some 3.5% on prolonged selling of semiconductor-related shares. Japan also reported a headline inflation rate which had slowed to 2.7%, prompting speculation over the central bank’s next move following its recent decision to raise interest rates, while the ongoing weakness of the yen has yet to prompt any sustained intervention from the authorities.

The generally bearish wave of sentiment following the most recent Middle East attack inevitably washed on to UK shores, with the premier index dipping into the red in opening exchanges.

Airline shares were hardest hit by the double whammy of higher oil prices and the possibility of fewer flights and therefore lower revenues, not only in terms of flights to the region but also on the possibility that customers might be more cautious about travelling at all. International Consolidated Airlines Group SA (LSE:IAG) and easyJet (LSE:EZJ) fell by 4% and 2% respectively, while the general overnight malaise over tech stocks weighed on the shares of Scottish Mortgage Ord (LSE:SMT).

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Even so, the FTSE 100 remains ahead by 1.4% so far this year, in a rare example of its performance overtaking that of the Dow Jones in the US. Its defensive characteristics have played into the marginal gain, while the likes of the oil majors have seen the obvious benefit of a rising underlying commodity price.

Closer to home perhaps, the FTSE 250 has now lost 1.8% in the year to date, with the UK economy still in need of a positive catalyst for growth which will not, it would appear, be forthcoming from a cut in interest rates any time soon.