Market snapshot: recessionary concerns reignited 

Sellers emerged Thursday, choosing to take profits following disappointing data out of the US. Our head of markets explains what's going on. 

Markets succumbed to a bout of profit taking as fresh economic data reignited recessionary concerns.

A disappointing retail sales release in the US set the tone, particularly given the importance of the consumer to economic growth, with department store sales dropping by 6.6% and online sales by 1.1%. Producer prices and factory production also declined, which on other days might have prompted hopes that the Federal Reserve would be seeing increasing reasons to lessen its aggressive monetary stance.

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However, despite the signs of cooling inflation and dampening demand, the Fed reiterated its stance yet again for a likely terminal rate of over 5%, with the next rate decision in February expected to result in a further hike of 0.25%.

Such recessionary concerns, alongside some generally disappointing updates, weighed on bank shares. A combination of lower fees from investment banking and higher provisions for customer losses has weighed on sentiment and an announcement that Microsoft Corp (NASDAQ:MSFT) would be laying off 10,000 staff added to investor malaise, prompting doubts over the likelihood of a soft landing for the economy.

As the fourth quarter earnings season continues to gather pace, earnings are generally expected to decline, with the importance of outlook comments and guidance from companies receiving close attention for economic clues.

In the meantime, the dips on the major indices removed some of the initial January sheen, although the Dow Jones remains ahead by 0.5% in the year to date, the S&P500 is up by 2.4% and the Nasdaq by 4.7%.

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Asian markets were similarly perturbed by the latest developments, with the possibility of an impending global recession remaining the main concern. Despite the Bank of Japan’s decision to leave its monetary policy unchanged, price action for both the yean and the Nikkei index suggested that investors are not convinced that the policy is sustainable.

The sour mood also dampened sentiment which has been higher recently on the possible economic impact of China’s reopening, which was expected to have positive repercussions in both domestic and international terms.

The bearish baton was inevitably passed on to markets in the UK, where a weak opening similarly dented some of the progress made so far this month by the main indices. Despite inflation having cooled slightly in the latest reading, the consensus remains that the Bank of England’s hands are still tied, with further interest rate rises to come.

Declines in the premier index reflected the risk-off approach, with the staples of the sectors which had underpinned the FTSE100’s outperformance – banks, miners and oils - showing some weakness.

Despite the initial markdown in early exchanges which have for the moment erased hopes for a new record high, the FTSE100 is still ahead by 4.7% in the year to date, while the more domestically focused FTSE250 index has added 5% on the back of some economic data which has recently confounded the most bearish.