Interactive Investor

Market snapshot: China Covid lockdown added to investor woes

15th March 2022 08:25

Richard Hunter from interactive investor

Just as it seemed that Covid had gone away, a series of lockdowns and special measures in China remind us that it's still out there and able to disrupt lives. Our head of markets examines latest developments here and overseas.

Markets were again unable to sustain gains as the cocktail of concerns was extended, with China now added to the list.

Surging Covid-19 cases in China saw one of Apple’s (NASDAQ:AAPL) main iPhone assembly suppliers, Foxconn, shut two factories as part of the Shenzen shutdown. More broadly, the most recent spike in cases has led to concerns that there could be further supply chain disruptions and that China’s economic growth could flatline in the first quarter.

Adding to investor woes was a reminder that the relationship between China and US remains fractious, following warnings around any Chinese support for the Russian war effort. In the background, the threat of added US regulation has added to tech concerns in the region.

These developments add to the current fragility of sentiment. The imminent Federal Reserve rate decision is expected to result in a hike, and interest rate sensitive stocks such as those within the tech sector have felt the force of selling pressure in the run up to the decision.

Not only does this directly impact the tech-heavy Nasdaq index, but there is also a negative effect on the wider S&P500, which has a large exposure to tech. In the year to date, the Nasdaq has now fallen by 20% and the S&P500 by 12.5%.

More positively, banking stocks have seen some support ahead of the interest rate decision, with a higher interest rate environment providing a healthier backdrop for the bread and butter parts of their businesses. Even so, stocks moving positively remain few and far between at the moment and the flagship Dow Jones index also remains down by 9% in 2022.

The oil price fell again overnight, although it is still ahead by 29% in the year to date. In terms of supply, the optimists remain hopeful that there will be some kind of resolution to the conflict as talks between Russia and Ukraine continue, which would ease some of the current shortfall. Also bearing down on the price were the developments in China, where the new wave of Covid-19 infections could crimp shorter-term demand.

This oil price decline, in relative terms, has also washed through to a weak opening for the FTSE100. The China demand situation also extends to concerns more broadly for resources, such that the mining sector has also opened lower in early exchanges, leaving the FTSE100 down by 3.8% in the year to date.

While the premier index is largely internationally facing in terms of earnings, there is of course a residual balance where the strength or otherwise of the UK economy is also influential.

With the potential for a further rate hike by the Bank of England later in the week, and with higher energy and tax bills possibly leading to a cost of living crisis, the UK economy is precariously poised at present even after an improvement in the unemployment rate. As such, it is unable to offer standalone solace to already beleaguered investors, even though the index as a whole has shown relative resilience so far.

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