Wall Street gave up some of its recent gains overnight, but things have started brightly in the UK today. Our head of markets explains what's driving sentiment.
Markets in the US drifted lower after a recent run of gains, opening up the debate as to whether the spike was something of a relief rally, rather than a conviction rally.
Investor confidence takes time to build but is easily shattered and, as such, volatility is never far away. Even so, overnight losses on Wall Street were shallow in the absence of any strong catalysts, with volumes light, suggesting that there could be an element of calm before the next set of challenges arrive.
The main test over the following weeks is likely to come in the form of the second-quarter and half-year reporting season, where the current state of the economy on the ground will become apparent.
At this early stage, pre-announced company data is suggesting that almost twice as many corporates are likely to show weaker rather than stronger numbers. This would represent an improvement from the first quarter of this year, but a decline from the same period a year ago.
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In the meantime, losses were capped by some economic data for durable goods in the US which showed a strong increase in May, implying a continuation of business spending. This in turn could vindicate the Federal Reserve’s insistence that the economy remains robust enough to withstand the current round of rate rises, although of course such data cannot be taken in isolation. Further releases today on consumer confidence and house prices will add further colour to the state of the nation.
The main indices therefore remain entrenched in negative territory for the year, with the Dow Jones having lost 13.5%, the S&P500 18% and the tech-heavy Nasdaq continuing to bear the brunt of a higher interest rate environment, losing 26% so far in 2022.
Asian markets were generally positive overnight, helped along by a report that home sales in parts of China rose last week. Even so, general sentiment remains cautious and commodity prices were mixed, with some weakness in the copper price comparing to a small hike in an oil price which remains ahead by 50% in the year to date, adding to the inflationary mix.
The slight rebound in the oil price and some further pressure on sterling gave the FTSE100 a decent head start in early exchanges, leaving the UK’s premier index down by just 0.8% in the year to date.
The average dividend yield currently runs at a generous 3.9%, which is sufficient to leave the index relatively flat on a total return basis, underpinned by a raft of defensive stocks which have a particular attraction in the current environment.
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The same cannot be said for the FTSE250, however, which is inevitably seen as a more accurate indicator of the UK economy and its prospects.
An average dividend yield of around 3% is of little solace to investors who have witnessed a decline of 17% for the index so far this year, with increasing pressure to come from inflation, interest rate rises and a potentially deteriorating consumer backdrop.
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