Market snapshot: investors reminded of threats to their wealth

Share prices have demonstrated some strength in recent sessions, but our head of markets points out that serious concerns remain.

Markets paused for breath after a recent relief rally, indicating that the raft of concerns which are currently plaguing investors remain constantly near the surface.

The hot UK inflation print was a stark reminder, if it were needed, that interest rate hikes remain on the cards globally. In turn, the possibility of a global recession increases, with additional pressure being felt by individuals and businesses alike.

Adding to the list of considerations, the third-quarter earnings season is beginning to pick up speed in the US, and so far the news has been marginally positive.

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The better-than-expected subscriber numbers from Netflix Inc (NASDAQ:NFLX) had given the main indices an initial boost, but during the course of the day there were mixed earnings from the likes of Procter & Gamble Co (NYSE:PG) and The Travelers Companies Inc (NYSE:TRV). After the bell, the releases continued the theme, with gains for International Business Machines Corp (NYSE:IBM) offset by share declines for Tesla Inc (NASDAQ:TSLA) and Alcoa Corp (NYSE:AA).

The early indications are that companies have yet to feel the full force of Federal Reserve actions, although the earnings beats which have generally been seen are by a lower margin than has more recently been the case. 

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This leaves investors with a further quandary – whether to reward companies for showing ongoing resilience, or whether to register some disappointment that the hikes have yet to crimp margins and profits to an extent which could presage less aggressive Fed policy.

In addition, on valuation grounds, there also seems little evidence that earnings growth projections have been lowered by an amount commensurate with a recessionary environment. Should a recession result from the current round of interest rate rises, the market will face the double whammy of lower profits and muted expectations. 

The lacklustre end to the trading day did little to move the dial on the negative picture so far this year, where the Dow Jones is currently down by 16%, the S&P 500 by 22% and the Nasdaq by 32%.

Asian markets were also affected by the inflationary news and the faltering economic outlook. The possibility of further intervention by the Japanese authorities to support the yen has increased after a renewal of strength from the US dollar, while in China benchmark lending rates were left unchanged. This was following recent suggestions that more stimulus could be forthcoming to prop up the world’s second-largest economy. However, by the same token the Chinese authorities could be seeking to toe the line with the current path of other major central banks and economies.

In the UK, the inflation print also leaves the Bank of England on a fine line between monetary tightening to tackle rising prices set against further weakening of an already ailing economy. In the background, the political machinations in government are causing harm to the reputation of the UK as an investment destination given the current instability. 

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Sterling remains under some pressure at around $1.12 which is a sign of some recovery against the recent and brief low of $1.03, but is also significantly away from the opening level of 2022, when it traded at $1.35. The generally dour prospects for the UK economy have been most keenly felt in equities by the FTSE 250, currently standing down by 27% in the year to date.

With few signals available to justify any sort of rebound, the premier FTSE 100 index also opened lower, leaving it behind by over 6% so far this year. A minor spike in the oil price supported the oil majors, while the housebuilders came under renewed pressure after a brief attempted rally over recent sessions. 

The appeal of the index on valuation and defensive grounds has waned slightly of late, even though outperformance is still evident on a relative basis compared to many of its global peers.