Market snapshot: rally cools as investors wait for news from US Fed

The Fed is engaged in a delicate balancing act, with this week’s Jackson Hole conference to reveal the latest thinking, says our head of markets, who also considers the summer lethargy weighing on UK markets.

The recent rally ran out of steam as investors braced for the latest Federal Reserve pronouncements later this week.

The likely highlight of the annual Jackson Hole symposium will be a speech from Fed chair Jerome Powell, where the committee’s latest thinking is likely to be unveiled. While no material change is expected from the current path of interest rate rises, there may be an update on emerging economic data, which is suggesting that the hikes already undertaken are beginning to have an impact.

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That being said, there have also been lagging indicators such as the latest jobs numbers and inflation print which suggest that the economy remains robust enough to withstand the current round of rises, even though this will not become apparent until after the event, given the trailing nature of most economic data.

Therein lies the difficulty of the Fed’s current strategy. It remains committed to tackling inflation head on, but is also aware that an overtightening of the screws could lead the world’s largest economy into a slowdown. At the same time, persistent inflation is likely to weigh on corporate margins although the recent reporting season showed that many companies are holding up relatively well.

The current delicacy of this balancing act was enough to put the brakes on a recently recovering Wall Street, with each of the major indices ending the week on a negative note. In the year to date, the Dow Jones is now down by 7%, while the S&P 500 and Nasdaq have shed 11% and 19% respectively.

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Asian markets were mixed despite the easing of financial conditions in China, where the central bank is aiming to encourage lending in an effort to boost an ailing economy. Quite apart from the impact of the latest Covid-19 variant, which has resulted in several lockdowns, the property market remains under severe pressure and there was also a power shortage in a key manufacturing region.

The general summer lethargy also weighed on sentiment in UK markets, where further monetary tightening is also likely to continue. The more recent strength of the US dollar as a haven investment has pulled the rug from sterling, which has had the impact of underpinning the premier index which derives much of its income from overseas, thus making those earnings more valuable in translation. The FTSE 100 remains up by 2% in the year to date despite a tepid opening today, although the FTSE 250, a more representative barometer of the UK economy as a whole, continues its weakness and has lost 15.5% so far this year.

In early exchanges, a further leg down in the oil price on demand concerns weighed on BP (LSE:BP.) and Shell (LSE:SHEL), with some weakness in recovery stocks such as International Consolidated Airlines Group SA (LSE:IAG) offset slightly by some tentative buying within defensives.