Interactive Investor

Market snapshot: China, US rates and what's helping the FTSE 100

4th January 2023 08:34

Richard Hunter from interactive investor

Despite Wall Street's shaky start to 2023, UK stocks have attracted buyers for a second day. Our head of markets has the latest.

US markets were off to a shaky start for the year, with mixed economic data and disappointing developments from heavyweights Apple Inc (NASDAQ:AAPL) and Tesla Inc (NASDAQ:TSLA) eroding initial gains.

A weaker than expected manufacturing PMI print which remained in contractionary territory perhaps offered some early hope that the economy was beginning to respond to a tightening monetary environment, with weaker demand and production in evidence. However, a later release showed that construction spending ticked up slightly in November, which would usually signal that the sector could be recovering.

Further economic clues will be available in abundance this week, ranging from the release of the Federal Reserve minutes and the latest JOLTS survey today and culminating in the non-farm payrolls figure on Friday.

In the meantime, the market continues to price in the likelihood of a further 0.25% interest rate rise from the Fed in February, with a terminal rate of around 5% later in the year. As time progresses and the time lag from previous rate rises diminishes, the full effects of the tightening should become clearer, with the major concern remaining that the aggressive hiking policy so far could tip the world’s largest economy into recession.

Sentiment was also hampered by reports that Apple will cut production in China following weak demand, with the shares dipping by almost 4%. Tesla shares, meanwhile, fell by over 12% following a disappointing reading on fourth-quarter deliveries. With the possibility of a recessionary environment weighing on sentiment and higher interest rates still in play, there seems little suggestion that the previous rotation from growth to value stocks is anywhere near ready to be reversed.

Despite a gloomy backdrop, which was underscored by a prediction from the International Monetary Fund that a third of the global economy would suffer recession this year, Chinese stocks gained while the Hang Seng index in Hong Kong made significant progress. 

Investors remain bullish on the potential for a Chinese economic rebound following the reversal of the zero-tolerance Covid policy. However, the subsequent rise in infections is also a warning flag, given the possibility of dampened demand as the effects of the virus wash through. At the same time, the economy is also likely to experience seasonally slower activity as the impending Lunar New Year festivities begin, while lower external demand could hamper exporters.

UK markets resumed their positive start for the year, despite a stark reminder of the inflationary pressures which are hindering any hopes of a recovery. The latest British Retail Consortium figures noted another hike in food inflation, while also highlighting that the ability of companies to contain price increases without passing these on to consumers will become increasingly challenging. 

Alongside this news, some weakness in sterling had previously underpinned first-day gains for the largely internationally focused FTSE100 index. The premier index nudged ahead once more in early exchanges, bolstered by further gains in the likes of Burberry Group (LSE:BRBY) and International Consolidated Airlines Group SA (LSE:IAG) as the China recovery story prompted broker upgrades.

On the other side of the China coin, some concerns regarding demand dragged on the oil price, taking BP (LSE:BP.) and Shell (LSE:SHEL) with it, which in turn constrained any stronger early gains for the index.

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