Market snapshot: investors favour FTSE 100 over Wall Street

There hasn't been the widespread levels of capitulation and pessimism which normally accompany market crashes, but stocks still suffer from a loss of confidence. Our head of markets has the latest.

Investors remain unable to shake off the shackles of inflationary and recessionary concerns, as markets continue to struggle to find a sustainable level.

The situation is particularly acute in the US, where fears remain that over-enthusiastic tightening by the Federal Reserve could lead the economy into recession. With interest rate rises of 0.75% already in the bag, it is expected that two further increases of 0.5% will follow in short order as the Fed wrestles with the pressure which inflation has brought.

The weakness over recent trading sessions has left investors bruised once more, with some apparently choosing to sit on the sidelines until such time as there are signs that the dust is settling.

As such, signs are being sought for other stress points. While the widely-watched Volatility Index is currently elevated at around 30 compared to historical average of 18, it is far from the spike of over 80 seen at the onset of the pandemic. Indeed, despite the weakness in the main indices which remains at the forefront of sentiment, the gradual declines have not been accompanied by the widespread levels of capitulation and pessimism which normally accompany market crashes.

Even so, the direction of travel risks becoming entrenched, with the Dow Jones now having lost 11.3%, the S&P500 15.9% and the Nasdaq 25.5% in the year to date. The resolve of the consumer will face another test later in the day with the release of the retail sales number for April, providing further colour from a vital cog in the US economy.

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In the meantime, there have also been other global economic factors to consider, such as the impact of lockdowns in China, which could add to the cocktail of concerns. The latest data showed a marked impact on consumption, industrial production and employment, posing questions as to whether the world’s largest economy will shrink in the current quarter.

With workers and consumers confined to their homes in the affected areas, the steep plunge in retail sales and factory activity may encourage the Chinese authorities to consider measures to ease the burden as the country begins its gradual move back to normality. Asian markets perked up on the possibility of a return to form overnight, even though the shutdowns will likely have left their mark.

The broad picture for the UK economy remains mixed, with falling wages offset by a further reduction in unemployment, with the latest update on inflation expected tomorrow. In the meantime, currency investors have been seeking havens such as the dollar in the face of the global challenges, which has been to the detriment of the pound.

More positively, the weakness of sterling against a rampant US dollar has underpinned gains for the FTSE100, which draws much of its earnings power from overseas and the US in particular.

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The premier index remains ahead by 1.3% in the year to date, helped by its exposure to an oil price which is ahead by 47% in 2022 and any number of resilient defensive plays. As such, the index has remained a rare investment destination of choice for investors amid the current maelstrom.