It's all eyes on data for clues as to whether central banks will have to continue their aggressive policies. There's anticipation ahead of corporate results, too, writes our head of markets.
Investors continue to spin many plates in assessing the state of the global economy, while markets made marginal progress in contrast to the more recent weakness which the uncertainty has brought.
In the US, the prospect of recession remains a central concern, with comments from certain Federal Reserve members underlining the likely need for further rate hikes. In turn, high rates are then likely to linger for longer than had previously been expected until the inflationary fire is finally extinguished.
The next clues will come in the consumer price index release tomorrow and producer prices on Thursday. Inflation is expected to have dropped to 3.1% in June from the previous month’s level of 4%, which would represent more progress. Indeed, a weaker than forecast figure could signal that inflation is moving tellingly towards the Fed’s target, which could result in a brief rally if the consensus then changes to one more hike this year as opposed to the two currently in place.
Alongside this week’s economic updates, the corporate reporting season will show whether the hiking cycle has crimped growth, earnings and margins over the last quarter, or whether the resilience of the economy at the macro level has translated to companies on the ground. Expectations are low for this season, with a sharp drop in earnings to levels not seen since the onset of the pandemic being seen as a real possibility. By the same token, this also leaves room for manoeuvre in terms of those companies which confound expectations, although for the higher growth stocks which have seen large gains this year, most notably big tech, the ability to positively surprise will be a tougher ask.
The slight gains in the main US indices overnight now leaves the Nasdaq ahead by 31% in the year to date, with the S&P500 and Dow Jones following with gains of 15% and 2.4% respectively.
Asian markets were also broadly positive, buoyed by the ongoing possibility of economic stimulus from the authorities in China. The stalling of the recovery has seen ailing consumer sentiment add to growing youth unemployment, while the property sector remains a particular concern. Chinese authorities have reportedly urged banks to ease lending restrictions on struggling property developers, although this seems unlikely to reignite home purchases. With other stimulative measures supposedly to come in an effort to boost business confidence, investors have been looking closely for signs that the recovery can be fully resumed.
UK markets opened for business in typically subdued mood, with labour market figures providing something of a mixed bag.
While some mitigation came in the form of an unexpected rise in unemployment to 4% from a previous 3.8%, the writing on the wall for further rate rises seems to have become clearer due to wage inflation. An increase of 7.3% to wages excluding bonuses matched the previous reading and was above forecasts, while at the same time underscoring the persistence of inflationary pressures which the Bank of England is struggling to control.
The weakening outlook for the UK economy, despite some surprisingly robust data at times, has weighed on sentiment and has led to the FTSE250 having now lost 4% so far this year, despite today’s slightly higher open.
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The likelihood of higher interest rates has also led to another uptick in sterling, which has a dampening effect on the FTSE100 where the majority of earnings emanate from overseas. In addition, commodity prices have been under pressure on prospects of weakening Chinese demand, while the average dividend yield of 3.9% across the index has become much less of an attraction given the rates now available in other asset classes, especially bonds.
A highly tentative switch out of defensive stocks into more cyclical sectors provided scant relief in opening trade, although the strength of conviction remains to be seen. In the meantime, the index is now down by 2.3% in the year to date, unable to establish a convincing run of more bullish sentiment.
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