Market snapshot: recovery momentum holds, as next test approaches

The FTSE 100 is consolidating its status as an outperformer this year, with the index now ahead by 2.5% in 2022, says our head of markets.

Markets continued their cautious grind higher, as investors took solace from a US economy which is showing increasing signs of being able to withstand the likely onslaught of interest rate rises to come.

The current consensus points to six further rate rises this year, which would leave rates at or slightly above 2.5%. At such a level, the restrictive intention of the rises should begin to kick in, but for the most part the US economy is showing further signs of improvement.

The non-farm payrolls report was slightly shy of expectations, but nonetheless 431,000 jobs were added. The release also highlighted a revision to February’s figures, up to 750,000 from the previously reported 678,000. At the same time, the unemployment rate came in at 3.6%, better than expected and close to regaining the pre-pandemic level of 3.5%.

These numbers will put further focus on the next set of economic data as they arrive, as investors weigh up whether the current recovery momentum can be maintained as the Federal Reserve turns its full attention to combatting inflation. In the meantime, the major indices have yet to recover lost ground for the year to date, with the Dow Jones standing down by 4.2%, the S&P 500 by 4.6% and the Nasdaq by 8.8%.

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Elsewhere, the conflict between Russia and Ukraine continues to engender a split between hope and despair. Reports of some progress in talks aimed at ending the war continue to be offset by further reports of Russian atrocities, which have seemingly strengthened the resolve of other nations to ratchet up sanctions once more. The oil price has shown some recent weakness after the actual and potential release of further supply, alongside a truce in Yemen, although even allowing for this dip the price is still ahead by 36% so far this year.

The next market test is approaching with the imminent onset of the first-quarter reporting season. Expectations are relatively low as compared to normal standards, although a small hike in revenues and profits is generally expected across the board. The recent Omicron variant may have had an impact in certain sectors, which in turn may have crimped corporate performance. On the other hand, recent results have suggested that companies on both sides of the pond that had cautiously been hoarding cash and cutting costs during the pandemic are now able to loosen the purse strings. This could result in the announcement of further dividend hikes and share buyback programmes, while from a broader perspective the resumption of brisk Merger & Activity cannot be discounted.

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Of equal importance will be the guidance and outlook provided from boardrooms. Supply chain constraints, which were in existence even prior to the conflict, are likely to have tightened, general consumer confidence may have suffered from the deteriorating environment caused by high inflation and the immediate outlook, which companies foresee will be vital in establishing a shorter-term roadmap for investors.

In the meantime, the generally positive baton has been passed to the UK in early trade following decent performances for the most part from the US and Asia, with the FTSE 100 consolidating its status as an outperformer this year. The index is now ahead by 2.5% in 2022, continuing to ride the wave of overseas institutional buying interest given its perceived attractions on both defensive and valuation grounds.