Market snapshot: relief rallies remain fragile

Despite a partial recovery yesterday, markets remain volatile, reflecting the situation in Ukraine and its implications. Our head of markets discusses latest developments.

Markets rallied strongly as the oil price weakened and as sentiment received an overdue boost, following hopes of some progress in diplomatic talks between Russia and Ukraine.

The rotation, which began in the FTSE100 yesterday, was echoed on Wall Street. The likes of the beleaguered airline and banking stocks found some buying support, largely at the expense of those areas which had been strong in the last few trading sessions, such as defence, mining and oil.

Indeed, the oil price dropped by as much as 17% overnight before staging a small recovery, following reports that the United Arab Emirates would support an increase of oil output via its membership of OPEC. Despite the drop, the oil price remains up by 47% in the year to date, mitigating but not eliminating the additional inflationary concerns which the spike has prompted.

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The strength of the rally on Wall Street resulted in a strong showing from the major indices, although each remain notably shy of last year’s levels. In the year to date, the Dow Jones is down by 8.4%, the S&P500 by 10.2% and the Nasdaq by 15.3%.

However, the sustainability of these relief rallies remains delicately poised. The conflict is ongoing and the road to resolution remains unclear, with any further military developments likely to unsettle sentiment immediately. With such an uncertain outlook, many possible scenarios remain on the table and, of course, any diplomatic developments will be watched with a keen eye.

In addition, until such time as it becomes possible to gauge the full economic impact of the conflict, concerns over the derailment of global growth will persist, exacerbated by the heightened levels of inflation which were in place even before the beginning of the conflict. The imminent announcements from the major central banks will prove pivotal in near-term sentiment, with an expectation that there will be some softening of the hawkish tones which had recently been promoted in view of the need to counter inflation.

The FTSE100 paused for breath at the open following yesterday’s surge, despite the strength of the showings from across the pond and to some extent a continuation of the relief in Asian markets overnight. In early exchanges, a minimal switch out of defensive stocks was in evidence, although for the most part price moves were reasonably stable.

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The move leaves the FTSE100 down by 3% in the year to date and, despite having given up the gains from the first couple of months, the UK’s premier index has noticeably outperformed many of its global peers. Its exposure to the oil and mining sectors and an element of defensiveness have combined to attract some international investment interest, although in general sentiment will be driven by news rather than fundamentals for the time being.