Market snapshot: expect another rollercoaster week

A sharp sell-off on Wall Street Friday has made for a volatile start here Monday as financial markets also eye developments in UK politics and the new chancellor's overhaul of the mini-budget.

Another rollercoaster week ended with the major US indices giving up most of the previous day’s strong gains.

Although initially opening higher, US markets reversed course – with only the Dow Jones finishing higher for the week – following a reignition of concerns following higher gasoline prices and rising inflation expectations.

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At the same time, retail sales data showed continuing resilience among the crucially important consumer which, added to a healthy labour market and a most recently hot inflation print, leaves the Federal Reserve to continue its path uncontested. 

The current market projection is that not only is a further 0.75% hike nailed on for November, but December will also see a similar rise as the Fed attempts to “front load” rates. Such a strategy would leave some gas in the tank to initiate rate reductions in the event of a recession, but for the moment investors are reeling from the reversal of what has been a sustained period of easy monetary policy.

The rising interest rate backdrop continued to put pressure on growth stocks, with the tech-focused Nasdaq once more in the firing line. Meanwhile, the banks reported a generally robust set of results, but in moves which will likely translate to the UK next week, there were further provisions for the possibility of bad debts should the economy buckle under the relentless pressure of the Fed’s policy path.

In the meantime, markets remain sharply down for the year. The Dow Jones has declined by 18%, the S&P500 by 25% and the Nasdaq by 34% amid volatility and pessimism which are unlikely to abate until such time as the Fed decides that it will pivot having achieved its objectives.

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Asian markets were also unable to gain a steady footing, with mixed economic projections exacerbated by the ongoing strength of the US dollar, which increases the price of imports and debt repayments for some countries in the region. The ongoing weakness of the largest local market in China has also led to declines for which the authorities stand ready to intervene, although so far any such moves have been limited.

For the UK, the drama remains centred on the government’s revised economic plans following the universal dismissal of its initial mini-Budget plans. With sterling currently remaining a rabbit in the headlights, further news is expected later on a new iteration of fiscal plans, while the retreat of Bank of England assistance will also be closely monitored for stress.

The general whipsawing of the currency and the uncertainty surrounding the UK’s immediate economic trajectory has been most keenly felt for equities in the performance of a FTSE250 index which has fallen by 27% in the year to date.

The previous resilience of the premier index has also been tested of late, with the FTSE100 now down by 7% this year. This comes despite the tailwinds of a weaker sterling, higher and resilient dividend yields and a healthy exposure to defensive stocks, all of which should provide some solace in the current environment to embattled equity investors.