Market snapshot: buoyant mood at start of new quarter

After a tough few weeks for global financial markets, there's a more optimistic air as the second quarter gets under way. Our head of markets explains what's behind the early move higher.

Markets finished a tough opening quarter on a positive note, boosted by signs of slowing inflation and in the absence of any further shocks from the banking sector.

In the US, the Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures index, rose by 0.3% in February, marginally less than the 0.4% expected. However, US markets have not yet been able to react to a subsequent announcement from oil producers that output cuts could be on the way. This could reignite inflationary concerns and the oil price surged by some 5% on the news, although remaining down by 2.5% in the year to date.

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Even so, the mood was relatively buoyant as markets ended the week, with slight gains in both US consumer spending and personal incomes also reported. Coupled with the cooler inflation number, these indicators renewed fresh hopes of a soft landing for the economy and that the interest rate hiking cycle may finally be nearing its end.

Even so, a further rate rise of 0.25% is still expected from the Fed in May, although at the same time the consensus is also beginning to price in some interest rate cuts before the end of the year. This currently opposes the stated Fed view of “higher for longer” and could be the source of contention – and further volatility – as the year progresses.

Further indications of the broader economic picture will of course follow, such as the non-farm payrolls figure later in the week, to which reaction could be affected in those areas closed for the Easter break. April will also herald the first quarter reporting season, with expectations for lower earnings leading some more cautious investors to point out that the likelihood of an earnings recession has certainly not been priced into markets.

By historical standards, valuations remain slightly rich, and the impact of the recent banking turmoil could also impact the outlook and guidance comments from companies on the ground.

Nonetheless, the challenges from the first quarter were largely overcome, with the Dow Jones finishing the quarter ahead by 0.4%, the S&P500 by 7% and the Nasdaq recording a particularly strong showing and rising by 17%, albeit in comparison to the 33% decline the index suffered last year.

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Asian markets were mixed to positive, with an unexpected drop in Chinese manufacturing sentiment undoing some of the optimism emanating from the recent service sector surveys.

Even so, the path of the Chinese economic recovery following the reopening seems largely to be on track, if slightly shy of the most optimistic projections, with consumer spending and travel in particular beginning to show signs of renewed growth. 

Markets in the UK opened the new quarter on the front foot, with the spike in the oil price boosting the shares of BP (LSE:BP.) and Shell (LSE:SHEL), in turn adding several points to the FTSE100 given the size of the index’s exposure to the oil and gas sector.

Indeed, there was a more general feel of a measured return to a risk-on approach, with some strength also seen in the miners and the more recently beleaguered banking stocks. The index as a whole is currently up by 3% in the year to date, albeit off first quarter highs, and is trying to re-establish the strength of its recent performance.

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The FTSE100's exposure to stable, cash generative and to some extent inflation-proof sectors, coupled with a sprinkling of defensive stocks and an average overall dividend yield of 3.7% ticks many boxes for the more cautious investor, including those from overseas who also appreciate the global exposure which the index provides.