Market snapshot: high hopes on peak inflation

Financial markets have had a good couple of days, but inflation and interest rate policy have the power to trigger rapid swings in sentiment. Our head of markets brings you the latest. 

Investors took fresh solace ahead of the latest US inflation report, where hopes of further evidence of peak inflation remain high.

The reading is due tomorrow, and is expected to show a figure of 8.1%, as compared to 8.5% in July. Recent dips in general commodity prices should bear down on the index, and with some economic contraction and a cooling of consumer sentiment evident so far this year, the door may even be slightly ajar for a modest downward surprise.

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However, the fact remains that the Federal Reserve will remain of the opinion that one swallow does not make a summer. Until such time that a trend can be established underlining easing inflation, coupled with weakness in the labour market which is not yet in evidence, the Fed will likely leave its aggressive stance in play, with expectations of a 0.75% interest rate hike in September still intact.

Despite the optimism washing through markets, perhaps of a temporary nature, the main indices remain deeply in the red for the year, with the Dow Jones having fallen by 11.5%, the S&P500 by 15% and the Nasdaq by 22.5% in 2022 so far.

Asian markets were positive amid light trading in view of holidays in South Korea and China. Even so, retail and industry data later in the week from China will be viewed for more positive developments during August, particularly given its recent travails on the back of weakening consumer sentiment, a property sector under duress and new lockdowns in face of a zero tolerance stance on Covid-19.

The UK has also had a strong couple of sessions, despite a slight miss earlier in the day on the GDP number. The strength of the US dollar has been weighing heavily on sterling, which has provided some support to the premier index where overseas earnings prevail. The FTSE100 has regained its positive performance in the year to date and now stands up by 0.9%.

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Gains were broad-based, with broker upgrades providing a fillip to the likes of Tesco (LSE:TSCO), Berkeley Group Holdings (The) (LSE:BKG) and Burberry Group (LSE:BRBY). Meanwhile, the banks continued to appreciate against a rising interest rate environment, while the miners attracted some buying interest in view of a gently and generally rising sentiment.

Nonetheless, trading is likely to remain volatile and sentiment brittle, with any disappointing economic releases providing the ability to upset the apple cart at any given time.