Market snapshot: only one show in town for investors right now
22nd March 2023 08:38
by Richard Hunter from interactive investor
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A banking crisis has put global central banks in a difficult place, none more so than the US Federal Reserve. Our head of markets looks at what policymakers might do at this week's rate-setting meeting.
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Easing tensions surrounding the recent banking shocks lifted optimism and in turn markets as investors dipped their toes back into the turbulent waters.
Further assurances from the US Treasury that they would be ready to provide more deposit guarantees to regional banks lifted the mood, as markets sought to erase some of the more recent losses arising from the general uncertainty of bank prospects.
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Today, however, there is only one show in town as the Federal Reserve announces its latest interest rate decision later.
Its decision is delicately poised given recent developments. The prospects for a 0.5% hike which were largely expected just two weeks ago seem to have evaporated. In contrast, thoughts from earlier in the week that the Fed could pause its hiking cycle given the backdrop could have a negative impact on sentiment, since it might signal that the central bank is aware of more bank developments to come which would reintroduce investor jitters on a large scale.
At the same time, inflation remains persistent and, with other measures already taken to stem the potential of a banking crisis, the Fed could revert its focus to more recent economic data which is suggesting that the economy may be beginning to slow as desired.
The compromise – and by far the most expected outcome from today – is a rise of 0.25%.
In the meantime, the main indices have made some progress in returning to the strength shown at the beginning of the year, with the exception of the Dow Jones, which is still down by 1.8% in the year to date. The benchmark S&P500 is now up by 4.3%, while the Nasdaq continues to attract buying attention alongside hopes that the interest rate hiking cycle may be at or very near its peak, and is ahead by 13.3%.
A surprise and unwelcome monthly increase in UK inflation, driven in part by more food price rises, adds to the difficulties of the Bank of England ahead of its latest rate decision tomorrow. Last week, the European Central Bank carried on with its hiking cycle, and with the Fed expected to do something similar, the likelihood of a coordinated approach seems inevitable, even though another rate rise at this juncture adds further pressure to an economy which has thus far avoided recession by the narrowest of margins. The more domestically focused FTSE250 has stabilised over recent days, but remains down by 0.7% in the year to date.
Meanwhile, the premier index has also weathered the most recent storm, although in early exchanges the FTSE100 drifted as a double broker downgrade to British Land Co (LSE:BLND) hit the shares and read across to other real estate firms. The tepid opening also reflected some flat positioning ahead of the Fed announcement, and leaves the FTSE100 ahead by just 1% in the year to date.
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Despite the apparent respite from the concerns emanating from the banking sector and some share price bounces over the last couple of days, there still remains much damage to repair. Over the last two weeks, Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) shares are still down by 7%, HSBC Holdings (LSE:HSBA) by 10%, Barclays (LSE:BARC) by 13%, and Standard Chartered (LSE:STAN) by 17%.
While some may see these drops as a buying opportunity given the relative capital strength of the UK banks compared to previous shocks, the fact that the prices continue to trail reflects high caution which will take some time to dissipate.
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