Market snapshot: can main indices recover losses to break even in 2022?

Wall Street spent most of Friday's session successfully recouping losses made at the open. Our head of markets examines reaction here at the start of a new week.

US markets largely shrugged off losses from earlier in Friday's session to finish another week higher, despite a stronger-than-expected jobs report which reintroduced some doubts over the Federal Reserve’s next move.

The non-farm payrolls report showed that 263,000 jobs had been added in November, compared to expectations of 200,000. At the same time, wage growth also continued, adding more inflationary pressure to the melting pot. The initial reaction dragged markets lower, with the Dow Jones down by more than 350 points at one stage, before recovering to finish up by 35 points.

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The release was the last monthly employment report before the Fed meets next week, at which the expectation remains that interest rates will be hiked by 0.5%, as compared to the 0.75% rises implemented in recent meetings.

The recovery in markets later in the trading session on Friday was believed to have been as a result of a Fed speech from earlier in the week resurfacing. Unusually dovish comments from Chairman Jerome Powell had lit a fire under markets after suggesting that the aggressive interest rate hiking cycle was close to peaking, even though doubts still linger on not only where the terminal rate will land but also how long it will need to remain there to stave off inflation.

Despite an increasingly optimistic end to the year, the main indices seem unlikely to recover their lost ground and the current rally may be too little, too late. During the course of 2022 the benchmark S&P500 has lost 14%, the Dow Jones 5% and the Nasdaq 27%, with the technology heavy index having suffered the dual concerns over interest rates and a lack of growth as the year progressed.

Asian markets were mostly positive on continuing hopes that the Chinese authorities would dial down their pandemic restrictions, in turn allowing the economy some room to breathe and attempt to recoup some of the economic damage which has been wrought by a zero-tolerance Covid-19 policy.

As more cities announced an easing of some curbs, the worsening state of the economy was further illustrated by a services PMI which came in at a contractionary 46.7, with the business activity and new business measures showing the weakest performance for six months.

Elsewhere in the region, further interest rate hikes are expected from both Australia and India later in the week, with Australian rates topping 3% for the first time in a decade. By way of contrast, the expected rise of 0.35% in India would follow three previous hikes of 0.5%, although central banks globally are clearly remaining on red alert until such time as inflation can be brought under control.

In the UK, the main index was largely undecided in opening trade. The more recent weakening of the US dollar and some recovery in sterling has held back an index which is largely reliant on overseas earnings, such that dollar weakness reduces some of this strength on repatriation. Even so, the FTSE100 remains in positive territory for the year, having risen by 2.3%, and underpinned by the further attraction of an average dividend yield of 3.6%.

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The FTSE250, however, continues to reflect the parlous state of the UK economy and an outlook which remains dour. Mirroring the difficulties being seen elsewhere inflationary pressure remains intense, prompting the central bank to continue with its hiking policy, further weakening an economy with little or no growth to absorb the shock.

The mid-cap index has now fallen by 17.5% in the year to date and similar to its US counterparts, is most unlikely to finish the year anywhere near positive territory.