Market snapshot: equity feeding frenzy continues

Yesterday’s rush to buy stocks following US inflation numbers has spilled over into Friday. Our head of markets explains what's going on.

A softer-than-expected inflation reading in the US lit a fire under markets, with investors scrambling to deploy some of the mountain of cash which had been sitting on the sidelines.

The rally was the largest since 2020, with interest rate sensitive stocks such as big technology mounting the biggest gains, resulting in a pop of over 7% for the beleaguered Nasdaq index. As investors waded into the market, treasury yields and the dollar both dipped as a result of the equity feeding frenzy.

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

The October inflation number rose just 0.4%, and by 7.7% versus a year previous, both of which were below expectations. Equally encouraging was the fact that core inflation also rose by less than had been feared, with a monthly gain of 0.3% and an annualised number of 6.3%. 

Perhaps inevitably equity bulls drew the immediate conclusion that inflation has now peaked, although it is unlikely that the Federal Reserve will make any major adjustments to its hiking policy until a downward inflation trend can be established and then maintained.

Even so, consensus for a lower rate hike in December is now firmly in the camp of a 0.5% rise, as opposed to the consecutive increases of 0.75% which have recently been seen.

In the meantime, the exuberance is likely to be challenged as and when the Fed reacts to the inflation number, which is likely to acknowledge the softer print but is unlikely to result in a dramatic pivot to its policy. 

Even so, the bounce has shaved some of the losses which markets had been experiencing on fears of economic recession. In the year to date, the Dow Jones is now down by only 7%, the S&P 500 by 17% and the Nasdaq by 29%.

The euphoria also spread to Asian markets overnight, with the broadest index spiking by over 5%. Again, this rise will lead to a positive week for the index, but nonetheless make little inroads in the year to date drop of 23%. 

• Stock markets rocket after shock US inflation data
• This US midterm election investing trick has worked 100% of the time
• A tech stock as cheap as chips?
• FTSE for Friday: after 10% rally, can UK shares rise even further?

However, sentiment was further boosted by an announcement from the Chinese authorities that some Covid-19 curbs would be eased, such as quarantine times for inbound travellers. The Chinese market has had a particularly turbulent time of late, with waning consumer confidence, a troubled property sector and tepid economic growth all contributing to a difficult immediate outlook.

The bullish baton was rather less evident in UK markets, with a negative GDP print looking likely to herald a recession in the UK as expected. The contraction of 0.2% was, however, better than the 0.5% which many had feared, although prospects for the UK economy remain gloomy amid untamed inflation, a rising interest rate environment and an increasingly difficult cost of living backdrop. Such prospects have been most keenly felt in the more domestically focused FTSE 250 index, which has now dropped 17% in the year to date.

The FTSE 100 index, on the other hand, although largely regarded as undervalued on both a historical as well as comparative basis to most of its global peers, failed to make much headway in the face of a stronger sterling, which feeds against the largely overseas earnings of the constituents. 

A marginal gain in early exchanges was helped along by Asian-facing stocks vying for the top spot. Even so, this small gain propels the FTSE 100 back into positive territory, with the index now marginally ahead by 0.1% for the year, a feat of outperformance against what has been and is likely to remain volatile territory for investors.