Market snapshot: bid approaches, inflation, interest rates and Rolls-Royce

Despite a strong session on Wall Street overnight, UK shares are making slow work of it Tuesday. Our head of markets explains what's going on.

Investors’ fluctuating fortunes continued, as Wall Street bounced back in a strong start to the week.

Sentiment was boosted by some corporate activity which saw confirmed bid approaches for both Horizon Therapeutics (NASDAQ:HZNP) and Coupa Software Inc (NASDAQ:COUP), while Microsoft Corp (NASDAQ:MSFT) shares spiked after announcing that it was buying a stake in the London Stock Exchange Group (LSE:LSEG). Alongside some response to choppy trading in recent sessions, US markets posted gains which temporarily steadied the ship. 

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Whether the renewed conviction will be sustained will become clear after the two key events of this week. The first comes in the form of the inflation release later today, with expectations that the core Consumer Price Index will have slowed to 6.1% from 6.3% and that the headline number will also drop to 7.3%.

More generally, the recent decline in oil and house prices could be having a deflationary effect, although the employment situation is yet to show any real signs of weakening. Any weakness in the inflation number could herald the beginning of a downward trend which would likely be well received by investors.

The print will also be in the minds of the Federal Reserve over a two-day meeting which will culminate in the next interest rate announcement tomorrow. With the consensus almost universally agreed on a rise of 0.5%, scrutiny will fall on outlook comments which are likely to incorporate the level of the terminal rate and also an indication of how long elevated rates may stay in place.

In the meantime, the stronger session did little to ameliorate the year to date performances of the main indices, with the S&P500 now down by 16%, the Dow Jones by 6% and the Nasdaq by 29%.

Asian markets put in a mixed performance, with the main driver continuing to be speculation surrounding the Chinese economy. Some concerns over a potential new surge in Covid-19 cases following some relaxation of the zero tolerance policy was set against the more economically helpful easing of restrictions for foreign tourists.

Either way, the economy has much ground to recover following the difficulties of this year and, although the outlook could be improving, there will inevitably be a time lag before the economy can get back onto the growth track.

In the UK, an ailing economy is also under the additional pressure of widespread strike action which threatens to derail some of the festive spirit. A further economic release pointing to rising wages is another inflationary pressure, even though in real terms wage growth is falling. While the jobs market is still showing some resilience, the potential reticence of firms to hire over coming months would impact the figure.

• UK jobless figure ticks up and job vacancies fall

In the meantime, the FTSE250 index which is seen as a proxy for the UK economy and indeed its outlook, is now down by 20% in the year to date.

In contrast with many of its peers, there is still some chance that the FTSE100 will post a gain for the calendar year, although by no means guaranteed. The premier index has moved in and out of positive territory over the course of a tumultuous year and currently stands ahead by just 0.8% after cautious moves at the open.

Reaction to the current cold snap seemed to weigh on additional challenges for the utilities, while Rolls-Royce Holdings (LSE:RR.) also slipped on the possibility of losing more flying hours on which it is largely rewarded alongside a broker downgrade.