Market snapshot: little respite for investors ahead of the weekend

It's not been a great week and the FTSE 100 is approaching a three-week low, yet it's still the best performing western index in 2022. Our head of markets brings you up to speed with the latest events affecting investor sentiment.

There is little respite at present from inflationary concerns, giving investors little room for manoeuvre in navigating the darkening economic clouds.

The European Central Bank (ECB) signalled its intention for an interest rate rise next month, coupled with a downgrade to growth forecasts. With the ECB now joining the clutch of central banks in tightening mode, the spectre of stagflation looms large once more as investors seek refuge from the gathering storm.

With the Federal Reserve likely to hike rates again next week, it remains to be seen whether the rises so far have had the desired impact on reining in the economy without tipping the country into recession. At the same time, corporate earnings are also likely to reflect the additional pressure and with some of the major banks now suggesting that there has been a pick-up in credit card borrowing, pressure on the consumer is mounting. This in turn could lead to defaults in due course, which could also signal the return of bad loan provisions from the banks following the clearance of the previous swathe of impairments resulting from the pandemic.

In the meantime, the latest US inflation reading is expected later today, with a high potential for a further upset for investors should the number exceed expectations. At present, a rise of 0.7% is expected for May, which would leave core inflation at around 6%. However, anything higher would again prompt expectations that the Fed’s current policy would need to extend beyond the rate hikes already expected in June and July.

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With the effects of a supply chain blockage caused by the pandemic yet to be solved and with the ongoing conflict between Russia and Ukraine, the main indices continue to slide in the absence of more positive market noises. In the year to date, the flagship S&P500 is now down by 15.7%, with the Dow Jones having lost 11.2% and the Nasdaq 24.9%.

The announcement of new lockdown measures in parts of Shanghai also detracted from the optimism in Asian markets earlier in the week. The potential for another reduction in demand was felt on the oil price, although the supply-side challenges still weigh heavily, leaving the price ahead by 58% so far this year.

The general wave of caution unsurprisingly rippled through to the UK as the main indices came under pressure once more. Despite its status as a relative haven in these uncertain times, the FTSE100 opened lower in early exchanges, just retaining its positive contribution for the year where the index has risen by 0.7%.

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A tentative round of buying within some defensive stocks could not prevent a general decline, as the current fragility of sentiment took the upper hand. With more economic data to follow in the coming weeks, a clearer picture of the outlook will emerge, although the news may not carry the encouragement which investors currently need.