Market snapshot: investors remain on red alert

As the end of an eventful first half of 2023 approaches, investors must digest another round of important economic data. Our head of markets explains the situation.

Investors paused for reflection on the year so far, with markets drifting lower in the absence of any clear buying signals.

The last trading week of both the quarter and the half-year will usually result in some portfolio rebalancing, particularly given the strength of the mega-cap technology stocks so far this year. Indeed, the Nasdaq bore the brunt of this switch as investors chose to take some profit after a strong run which has seen the tech index rebound strongly after a torrid 2022. 

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In addition, the new half-year will also herald the latest round of the reporting season, where expectations remain guarded given the tight monetary policy backdrop. It remains to be seen whether the banks, for example, are experiencing any loan delinquencies following the rate hiking policy from the Federal Reserve, which likely prompted the banking turmoil seen earlier in the year.

In the meantime, investors remain on alert as another raft of economic data this week could provide further clues as to the Fed’s next move at its July meeting, where a further rise of 0.25% is currently anticipated. Data includes the likes of durable goods, housing statistics, the final reading on first-quarter GDP and several consumer surveys.

The releases culminate with Friday’s Personal Consumption Expenditures report, seen as the Fed’s preferred gauge of inflation. While the report should also provide updates on consumer income and spending, the inflation element is most likely to grab the attention of investors. Coupled with the monthly non-farm payrolls number due at the end of next week, there will be more ammunition for the Fed to make its next decision.

Sentiment has also been dampened in recent days by geopolitical concerns, most notably the mini-revolt in Russia at the weekend which appears to have subsided as quickly as it escalated. Even so, the current weakness seen in the market has done little to mar a generally strong performance in the year to date, with the Dow Jones having added 1.7%, the S&P500 13% and the Nasdaq 27%.

In Asian markets, there was some relief in China where a stuttering economic recovery has crimped the market performance of late. Premier Li Qiang commented that growth in the latest quarter would be higher than in the first, with the official target of around 5% for the year still possible. He added that Beijing would be rolling out more policies to expand domestic demand, which could tamper some of the concerns surrounding the country’s ailing property sector, high youth unemployment and a non-committed consumer.

The comments from China gave an early boost to a FTSE 100 which had given up any gains in the year to date prior to today’s open. Wilting sentiment given the twin concerns of Chinese and US economic prospects had weighed on an index with heavy exposure to both, while the outperformance of tech stocks across the pond may well have drawn some investment back to the US with growth in mind. 

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The bounce in early exchanges was driven by renewed interest in mining stocks, with some read across to the likes of Prudential (LSE:PRU) which could also benefit from any further recovery in China as implied by the Premier’s comments. Broker downgrades to BT Group (LSE:BT.A) and the London Stock Exchange Group (LSE:LSEG) took some sheen from the positive open, with the FTSE100 now ahead by just 0.5% in the year to date.

The more domestically focused FTSE250 also saw some relief, although the most recent evaporation of sentiment towards a UK economy buffeted by anaemic growth and more interest rate rises has left the index down by 4.2% so far this year.