Market snapshot: recessionary fears back at top of the agenda

Wall Street slumped by over 2% yesterday and London is following the negative trend this morning. Our head of markets explains why.

Recessionary fears raced back to the top of the agenda, as global central banks continued the policy of relentless interest rate hikes.

Any thoughts of a Santa rally have all but evaporated, with previous hopes of peak inflation and interest rates being soundly rejected.

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The previous Federal Reserve interest rate rise on Wednesday was accompanied by similar actions from the ECB and Bank of England, as well as hikes in the likes of Switzerland, Mexico, Norway and Mexico. Comments from the ECB in particular that “we are not slowing down, we are in for the long game” was in direct contrast to what markets had been pricing in over recent weeks.

US markets endured a torrid session. The darkening outlook for investors was underlined as the latest retail sales figure declined by more than expected in November, just ahead of the crucial festive season.

With the US consumer being the major driver of economic growth, a slowdown at this time of year in particular could signal that the tightening rhetoric is beginning to filter through. The 0.6% decline was above an estimate of 0.3%, and despite also representing an increase of 6.5% on the previous year, Black Friday was not enough to save the day. Optimists will now turn to a hope of a last minute surge in December to put consumer spending back on track.

Until now the consumer had been showing signs of resilience against a backdrop of high inflation and rising rates, even though some of the spending was seemingly coming from an increase in credit card balances. If fears of a recession are to become self-fulfilling, the current volatility could well spill over to the next calendar year.

In the meantime, the latest lurch downwards has left the major indices licking their wounds once more. In the year to date, the benchmark S&P500 has now declined by 18%, the Nasdaq by 31% and the Dow Jones by 9%.

Nor was the hawkish messaging lost on Asian markets, which struggled to make ground amid these growing recessionary concerns. Quite apart from the uncertainty surrounding the propensity of the Chinese economy to recover after being restrained by the latest round of pandemic infections, Japan’s manufacturing activity also shrank by the most in two years in December.

For China, retail sales declined further and industrial production growth more than halved from the previous month, delaying any possibility of an immediate bounce back.

In the UK, the premier index showed restrained weakness on the open, confirming its position as one of the few developed global indices to have made any progress whatsoever.

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In the year to date, the FTSE100 is ahead, albeit by just 1%, having found some investor support from overseas given its unique blend of mature and established companies which have withstood previous environments such as this. The strength of the US dollar has also added support to an index dominated by overseas earnings, while an average dividend yield of 3.7% is an additional attraction.

In stark contrast, the more domestically-focused FTSE250 has reeled from the weakness of the local economy so far, let alone the likelihood of stunted progress in the nearer term. The index has fallen by 20% so far this year, mirroring a worsening global sentiment which is primarily being driven by recessionary worries.