Market snapshot: riding out volatility

There's plenty to watch for this week, not least data that could influence the size of future increases in US interest rates. Our head of markets also looks at UK banks.

A busy week of economic releases will further inform the thinking of central banks, as they grapple with the twin issues of inflation and the speed of interest rate rises.

In the US, inflation numbers and the monthly non-farm payroll data are likely to underline the Federal Reserve’s current focus on the former, with the latter now implying an economy which is nearing full employment. Having digested the initial interest rate rise, some are now calling for a more aggressive approach from the Fed in tackling soaring inflation. The possibility is now growing for 0.5% hikes at both the May and June meetings.

From the Fed’s perspective, this remains a difficult balancing act. The economy seems to be on a recovery trajectory, but the Treasury yield curve in the US is getting close to inversion. This implies concerns that there may be an overshoot on hiking rates, which could result in an unwanted Fed-induced recession .

Markets were quick to reflect the ongoing dichotomy, with banks rising on a rising interest rate environment at the expense of growth stocks and big tech in particular. The more recent recovery in shares has been steady but unconvincing, with the major indices remaining in negative territory in the year to date. The Dow Jones is still down by 4%, the S&P 500 4.7% and the Nasdaq 9.4%.

Meanwhile, the oil price continues its volatile journey this year, with the latest development of a lockdown in Shanghai weighing on near-term demand and pushing the price down by almost 4%. Even so, this does not remove the stark reality of a general imbalance between global supply and demand, and the price remains up by 49% in the year to date.

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A relatively resilient performance from Asian markets despite the announcement of the latest lockdown has given a small positive nudge to the UK’s premier index. More broadly, the FTSE 100 is maintaining its progress, having been held back over recent years because of its perceived exposure to mature, cyclical stocks, as opposed to growth stocks such as technology, which is now playing into its hands.

The index remains up by 1.5% in the year to date after a cautiously positive open, where a drift towards recovery stocks is offsetting some early weakness in the oil majors on the back of the oil price decline. A further reduction of the government stake to 48.1% has lifted NatWest (LSE:NWG) shares, although Barclays (LSE:BARC) is weaker having reported the overselling of some securities in the US which could cost up to $593 million.

For longer-term investors, the current gyrations within markets on a daily basis are reiterating the importance of riding out the volatility. The overarching theme of time in the market rather than timing the market has been vindicated once more as the end of the first quarter of a tumultuous year approaches.