As defensive stocks enjoyed another boost in the US overnight, there's optimism in the UK on Friday. Our head of markets explains.
Markets remain finely poised and prone to volatility, with the immediate outlook for economies still up for debate.
In the US, a choppy session ended positively for markets as investors sought defensive sectors such as healthcare and consumer staples, typified by companies with strong and stable earnings. This approach is not new, but is in continuing reaction to the Federal Reserve minutes from earlier in the week which suggested the likelihood of a more aggressive approach to tackling inflation.
On the other hand, although more hawkish than expected, the release of the minutes at least provided some much-needed clarity on the pace and scale of the Fed’s monetary tightening. This both provides room for the Fed to navigate the extremely difficult balancing act of reducing inflation without derailing the economy, while for investors it gives an opportunity to position for a higher interest rate environment.
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Despite the late session turnaround, the major indices are left with a hill to climb to recoup the losses encountered in the year to date, where the Dow Jones has shed 4.8%, the S&P500 5.6% and the Nasdaq 11.2%.
Of course, the list of concerns does not end there. The current conflict between Russia and Ukraine is having real economic impact, as well as being the largest humanitarian crisis of modern times, with the damage to supply chains affecting anything from energy to metals to food. Longer term, there is some debate as to whether the globalisation which has become entrenched over recent decades is now set to unwind, with the potential for countries to aim for self-sufficiency as far as possible.
In the meantime, attempts to replace Russian oil were ratcheted up further with the potential release of 240 million barrels of emergency stocks as further sanctions were imposed on the military aggressor. Despite a subsequent dip, the oil price remains up by 30% in the year to date, driven by lower supplies and an uncertain level of demand following the most recent lockdowns in China.
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The late recovery on Wall Street and the accompanying hunt for defensive cash earners has fed straight through to the UK’s premier index, where a strong opening adds to previous gains and leaves the FTSE100 ahead by 3.1% in the year to date.
The mark up in share prices was broad based, with the selection of cyclical mature companies in the index providing continuing attraction to investors looking to consolidate the trend towards value stocks, at the expensive of growth stocks in a tightening environment.
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