Market snapshot: monitoring risk rather than growth

US investors returned after a long weekend and reacted immediately to a resumption of hostilities in the Middle East, which left the oil price hovering around $100 per barrel again.

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Markets were then forced lower as the spectre of inflation came back into the spotlight. In the absence of any notable company reports, which will not resume in earnest until next month, attention has switched to monitoring risk rather than growth. The outlook in the Middle East has recently worsened once more, with any signs of détente looking elusive. Fresh fighting in the region has seen Iran targeting a US base in Jordan as retaliation for US strikes on some of its oil tankers, while Iranian-backed Houthis struck several cities in Saudi Arabia.

Such focus comes at a time when consumers could be affected by the lack of supply as the colder seasons approach. While the US may have passed its peak driving season, gasoline prices remain high and oil derivatives such as diesel have seen higher levels impact a raft of industrial processes.

This adds another level to the inflationary concerns which have blighted investor thinking over recent weeks. There is a growing sense of acceptance that the Federal Reserve will need to hike interest rates next week – with the employment part of its dual mandate looking healthy enough – in an effort to tame levels of inflation which have exceeded its 2% target for over five years.

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As such, the impending readings take on added significance. The Producer Price Index tomorrow is expected to show an acceleration at the wholesale level with a rise from 4.7% in July to 5.4% in August. Of more importance, perhaps, will then be Friday’s release of the Consumer Price Index, where headline inflation is expected to remain stable at around 3.4%, although a hotter reading may well force the Fed’s hand in raising rates. The question would then shift to whether such a hike would be solitary, or whether it would usher in a tightening regime.

Amid the economic turmoil, there was some relief among semiconductors which limited losses on the more technology-focused indexes as a result. The extraordinary build-out within AI continues apace, with several companies either joining forces or simply raising huge levels of fresh funding in both the debt and equity markets. The VanEck Semiconductor index rose by 1.2%, while Intel Corp (NASDAQ:INTC), Advanced Micro Devices Inc (NASDAQ:AMD) and Broadcom Inc (NASDAQ:AVGO) spiked by 9%, 6% and 3% respectively.

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Treasury yields and renewed trade tensions between the US and Canada are additional factors in keeping sentiment brittle at the current time. The main indices have nonetheless largely protected decent gains in the year so far, with the Dow Jones having added 9.8% while the more tech-focused S&P500 and Nasdaq are ahead by 12.1% and 13.7% respectively.

The nuanced economic situation in the UK has similarly unsettled investors. The economy is far from immune from the global spike in bond yields which have heightened interest costs on the large deficit, the country is more exposed than some to elevated energy prices, and the Budget next month brings another level of uncertainty, with the severity of any measures as yet unknown.

In the meantime, ahead of an interest rate decision where the Bank of England is expected to hold rates, this Friday sees the release of GDP for July which is unlikely to raise spirits. A weak retail sales recently reading could presage a negative GDP print, leaving the Bank torn between its focus on both inflation and a tepid economy. Such caution has been felt most keenly in the FTSE250 over recent sessions, although an earlier rally over the last few months has left the index ahead by 8% in the year to date.

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The early September gloom also extended its reach to the FTSE100, which limped to another tepid open. The lack of enthusiasm was felt within a broad markdown, with the oil majors among the few to offer any resistance, alongside Computacenter (LSE:CCC) which gained again after pleasing interim results yesterday which led to a broker upgrade. The rising oil price and air traffic control problems which have affected British Airways left parent International Consolidated Airlines Group SA (LSE:IAG) under pressure, while Burberry Group (LSE:BRBY) slumped after a broker downgrade.

The premier index remains ahead by 8.6% so far this year, but is seemingly caught in a range at present from where there seem few positive catalysts on the immediate horizon.