Market snapshot: further tests to come in second quarter

As the first quarter of 2023 comes to a close, our head of markets looks at where stocks are now and what's influencing investor behaviour ahead of Q2.

Investors have regained some collective resolve as the first quarter comes to a close, despite some serious examinations so far this year.

January was notable for a strong bout of early year optimism and a risk-on approach, whereas market mettle was then tested by renewed interest rate and inflation concerns in February and banking sector turmoil in March. The new quarter will bring further tests as the interest rate picture clears, along with a quarterly reporting season which could not only show some scars from the first quarter, but will be equally important in terms of company outlooks.

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In the meantime, the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures index will be released today, with core prices expected to rise by 0.4% in February as compared to 0.6% in January. Although there was some market concern that the expected figure could disappoint after the release of similar data from Germany, there is a split of opinion towards the Fed’s next move.

On the one hand, the weekly jobless claims figure in the US rose slightly added to a slight downward revision to the GDP number from 2.7% to 2.6%, both suggesting that interest rate rises are at last beginning to gain traction. In addition, the possible tightening of lending criteria by banks to consumers could also help to further tap the brakes on economic growth, which could lead to a slight softening of the Fed’s hiking policy.

However, inflation still remains above target and overnight comments from various Fed members laid the ground for one more hike, leaving investor consensus split evenly between the likelihood of a further 0.25% rise at the next Fed meeting, or no rise at all.

The quarter has seen technology stocks as an unusual haven for some investors, who consider that the sector both provides some defensiveness and is also far enough removed from the banking sector turmoil to swerve the repercussions. The sector has also been boosted by hopes of interest rates at or near peak levels, with the Nasdaq ahead by 15% in the year to date, and the benchmark S&P500, which also has a significant tech focus, up by 5.5%. The Dow Jones has clawed back some of its recent losses and stands down by just 0.9% so far this year.

Asian markets were mixed to positive overnight, with China remaining the centre of attention. There was some disappointment from a manufacturing activity reading, although a service sector number showed a gathering of recovery momentum. The outlook remains mixed, however, with global factors outside of the country’s control such as weaker demand and higher commodity prices providing a drag.

Nonetheless, while the strength of the recovery may not be as fierce as expected, there are sufficient signs that the actions of the authorities in loosening trading and regulatory conditions could yet provide a decent fillip to economic prospects.

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UK markets are also striving to end the quarter in positive territory, albeit away from the recent highs which propelled the premier index to over 8,000 and saw a boost to the domestic barometer of the FTSE250, which showed promise early in the year after an effective bear market in 2022.

While both indices are barely changed in opening exchanges, they are currently both grinding out year to date gains, with the FTSE100 ahead by 2.4% and the FTSE250 by 0.4%.

Sentiment was marginally buoyed by the global gains elsewhere, but share price movements in early trade were dominated by broker notes, with upgrades to the likes of Beazley (LSE:BEZ), International Consolidated Airlines Group SA (LSE:IAG) and Pearson (LSE:PSON) providing early boosts, while on the flipside the red pens were taken to some stocks within the utility and banking sectors, such as SSE (LSE:SSE) and NatWest Group (LSE:NWG).