Market snapshot: big assumption could leave optimists disappointed

Nerves have got the better of investors as a potentially pivotal week unfolds. Our head of markets explains.

Recession remains the single largest concern and, for the US, the actions of the Federal Reserve may determine that outcome. While another rate hike of 0.25% is fully expected this week, the accompanying comments will be of equal interest.

There is an increasing throng of optimistic investors who are not only pricing in that the aggressive hiking rate is coming to a close, but also that there is a possibility of interest rate cuts later in the year. This assumption is one for which they could be sorely disappointed, and Federal Reserve Chair Powell is most likely to reiterate the mantra of “higher for longer” until such time as inflation is finally brought under control.

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Further clouding the picture is a resilient labour market which has yet to show many signs of buckling and a strong start to the year by equity markets, which itself could prompt further consumer spending. Whether this could be inflationary remains to be seen and would not be a welcome development in the Fed’s plans.

There are some signs that the hiking cycle is beginning to have an impact, not least of which from the outlook of those companies which have reported so far this quarter. Indeed, earnings guidance has been scrutinised for the immediate projections of the corporates on the ground and there has been a notable groundswell of cautious or even negative prospects as the pressure on growth intensifies.

Even so, the glass is currently half-full for the year, with a general consensus that the scale of hikes has peaked. As January draws to a close, the benchmark S&P500 is ahead by 4.7%, the Dow Jones by 1.7% and the Nasdaq by 8.9%.

Investors were similarly wary in Asia, despite some more promising economic data from China. Factory activity expanded in January after a prolonged bout of contraction, while a services indicator also pointed to renewed growth. These could be early signs that the economy can now begin its recovery after the Covid-19 restrictions, with the world’s second-largest economy potentially boosting other markets if growth can be revitalised.

Indeed, new projections released by the International Monetary Fund included higher global growth estimates, although at a weaker rate than the historical average. For the UK economy, the IMF foresees a contraction this year, which could be sandwiched between a relatively robust 2022 and something of a bounce back in 2024.

Unfortunately, with the Bank of England’s hands being tied to a large extent due to persistent inflation, higher domestic interest rates are likely to prove a drag on growth in the immediate future.

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Looking at the latest global market developments, investors had nowhere to turn and so unsurprisingly the main UK indices opened lower. Stocks were marked down, with risers few and far between, although there was some minor strength in Kingfisher (LSE:KGF) and Compass Group (LSE:CPG) following broker upgrades.

For the most part, however, there was a broad mark down across sectors as growth concerns persisted. Even so, the main indices remain ahead in the year to date despite these latest jitters, with the FTSE100 index having added 4% and the FTSE250 5.5%.