Stock markets started 2022 in fine style, but it hasn't taken long for investors to switch focus to some of the big issues expected to affect sentiment in the year ahead.
After a sprightly start to the New Year, investor focus has switched to the more pressing issue of interest rate hike expectations.
Rising Treasury yields in the US prompted a bout of rotation from high-growth stocks, such as technology, into value, boosting financial and industrial shares.
In particular, interest rate sensitive stocks such as the banks attracted buyers ahead of the imminent fourth-quarter reporting season. Although it is extremely unlikely that rates will rise to historical levels, there is nonetheless an improvement in sentiment given that the impending environment should improve prospects for the banks over the coming months.
Minutes are due later from the latest Federal Reserve meeting in December, and will likely reveal the latest thinking on the need to curb stubbornly high inflation by tightening policy. As such, the current expectation is for an initial hike in March, which is part of the reason for rising yields.
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The rotation bore down on the Nasdaq index and left the S&P500 virtually flat, although it also propelled the Dow Jones Industrial Average to another record closing high, despite a manufacturing reading which came in slightly shy of expectations, but nonetheless confirmed continuing growth.
Asian markets were mixed following the draught from Wall Street, with similar themes playing out as technology shares came under pressure, with local currencies also reacting negatively to the ongoing strength of the greenback.
The more circumspect sentiment from other markets inevitably unsettled UK investors in early trade, following a strong initial session for the year. Even so, losses were minimal in early exchanges with some support being found from stock specific strength, such as InterContinental Hotels Group (LSE:IHG) and Ocado Group (LSE:OCDO), both of which rose following broker upgrades.
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More broadly, the imminent reporting season will provide further opportunities for companies to demonstrate their most recent progress and, in particular, could help assuage some of the concerns arising from the perceived economic impact of the Omicron variant on recovery hopes.
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