Market snapshot: can optimism in US buoy UK stocks?

Bulls argue that much of the negative news has already been priced into stocks, but there are still lots of things that could go wrong, not least the sensitive geopolitical situation. Our head of markets explains.

The mood has lifted slightly as investors begin to assess the possibility that inflation could be nearing a peak.

In the US, while the overall inflation number continues to run hot, core inflation – which strips out food and energy prices – saw gains which appear to be moderating in comparison to recent readings. This in turn raises the question of whether much of the negative news has already been priced into stocks, although the situation remains fluid.

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Either way, the inflation reading will likely have cemented the Federal Reserve’s determination to hike interest rates more aggressively than had previously been suggested, with its previous assertion that inflation would be transitory now appearing to have left it behind the curve.

At the same time, the main concern has been that pushing the brakes too hard by way of interest rate hikes could avoid the soft landing which the Fed would desire and lead the country towards recession. In any event, fears that central bank actions globally could materially slow economic growth this year remain in play.

Alongside the slightly lighter volumes which traditionally accompany the four day trading week leading into Easter, the quarterly earnings season is now kicking off in earnest as the US banks begin to report.

Inflationary pressures such as energy and labour costs are expected to pressure profits, which are unlikely to scale the heights of last year. While there are expected to be some strong numbers emanating from the energy and materials sectors, the likes of consumer discretionary and communication stocks may be feeling the pressure more than most.

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A decent showing within the airline sector offset some of the disappointment from JPMorgan Chase & Co (NYSE:JPM), whose numbers set the season off to a weak start as it reported a drop in quarterly profit of 42%. The shares were subsequently marked down by over 3%, with the likes of Citigroup Inc (NYSE:C) and Morgan Stanley (NYSE:MS) reporting today.

Although the generally upbeat session reduced some of the declines, the performance of the main indices remains weak. In the year to date, the Dow Jones has lost 4.9%, the S&P500 6.7% and the Nasdaq 12.8%.

A signal of possible stimulus from Chinese authorities aiming to avert an economic slowdown following new Covid-related lockdowns led to a positive session in Asia. Unfortunately, this has failed to wash through to the UK in early exchanges.

A slightly lower open nonetheless leaves the FTSE100 in the relatively isolated position of remaining positive so far this year, having added 2.3% in the year to date.

While the gains have been modest, the underlying strength of an exposure to defensive stocks, a generous average dividend yield and an ample presence of oil and mining stocks have combined to underline the current attraction of the UK as an investment destination.

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Although facing the same challenges of rising inflation, interest rates and pressure on corporate earnings as a result, the index is littered with examples of stocks which are well positioned to combat these issues.