Market snapshot: investors pause as inflation fears persist

While major US indices remain deep in negative territory, the FTSE 100 stands ahead by 3.3%, says our head of markets Richard Hunter.

Investors took a pause for breath after the recent rally as the spectre of inflation continues to loom large.

The phased ban of Russian oil imports by the European Union lifted the price once more. With its wide applications across so much of the economy, ranging from manufacturing to travelling to energy, a higher oil price inevitably adds to inflation. While the price settled after the initial announcement, it nonetheless remains up by 49% in the year to date with no immediate signs of respite.

Comments from a Federal Reserve member also underlined the pressure, with a suggestion that interest rate rises could continue until there is a significant reduction in inflation. This introduced some doubt as to whether the Fed would pause its hiking cycle after the expected rises in June and July as had previously been hoped.

At the same time, there was a slight reduction in US consumer confidence in May, with the rising rate environment reducing the likelihood of big ticket purchases, including but not limited to houses and cars. Should this reticence become more widespread, it would crimp economic growth and reignite fears of wider stagflation.

• Five tips to cope in a bear market
• Consumer staples shine as inflation soars – but can the boom last?
• What you need to know about the energy windfall tax

Non-farm payroll figures at the end of this week will receive their usual investor scrutiny and, in particular, whether the Fed hikes so far are having any impact on an otherwise robust jobs market. The consensus is for 350,000 jobs to have been added in May, as compared to the addition of 428,000 in April.

In the meantime, the major indices remain deep in negative territory for the year, with the flagship S&P 500 having fallen 13.3%, the Dow Jones 9.2% and the Nasdaq 22.8%.

Asian markets were more circumspect, despite the lifting of most restrictions in Shanghai and Beijing. The ripples of lower Chinese economic activity and confidence over the last few months have yet to fully wash through to the global chain, which adds to the fragility of sentiment as investors grapple with the concerns of slower growth and persistent inflation.

Even so, the FTSE 100 opened defiantly higher in early trade, adding to the cumulative performance in the year to date. The FTSE 100 now stands ahead by 3.3%, underpinned by the defensive traits of any number of its constituents, allied with the perception that the market as a whole remains relatively undervalued. Early exchanges were characterised by a rise in the more economically sensitive sectors such as the banks and the airlines, while energy stocks in general were subject to modest selling pressure.