Risk appetite evaporated Friday as investors came to terms with the real possibility of higher rates for longer after a busy week of economic releases.
In the US, the heavily tech exposed S&P500 and Nasdaq bore the brunt of the downward pressure given the restrictive nature of higher interest rates, should they persist. While no further rise is expected in this week’s Federal Reserve meeting - and despite increasing hopes that the end of the hiking cycle may actually have been reached - there is a growing acceptance that rates may need to remain in place at the current levels for most of next year, in a blow to the optimists who had been pricing in a series of cuts.
The latest batch of data painted a mixed picture which did nothing to clarify the situation. Consumer inflation expectations cooled and industrial production rose, although import prices jumped, while a further hike in the oil price heightened inflationary concerns. In the background, the current strikes in the auto industry are also stoking fears that this could lead to a rise in car prices, which would be another inflationary input to be considered.
The Fed decision on Wednesday is fully expected to result in a no-change decision, but crucially the accompanying comments should give something of an insight into its current thinking. With investors currently split on the outlook over the next year, the latest thoughts from the Fed could well prove to be market moving. In the meantime, the main indices are comfortably ahead in the year to date despite a difficult couple of trading months, with the Dow Jones having added 4.4%, the S&P500 16% and the Nasdaq 31%.
Asian markets echoed the cautionary vibes, with technology shares also under pressure following reports that a top Taiwan chipmaking company had requested a delay to deliveries. More positively, China reported better than expected retail sales and factory output numbers, although the property sector remains a central concern. While demand has reportedly been inching up over recent weeks, the stains of half-finished buildings, consumer apathy and the financial wellbeing of some major developers are proving hard to shift.
Another interest rate decision on Friday will come from the Bank of Japan, which could well affect sentiment in the region. In particular, investors will be assessing whether the central bank is looking to move away from an ultra-loose monetary policy which has been a hallmark of the economy for some considerable time.
Central bank pronouncements are not confined to overseas, with the Bank of England scheduled to announce its latest interest rate decision on Thursday. The current consensus is for a further rise of 0.25% to a new level of 5.5%, although opinion is sharply divided as to whether this will prove to be the terminal rate. Recent cracks in the UK economy, offset by new inflationary pressures such as energy prices, leave the outlook finely balanced, with some still insisting that there could be one more rise to come.
- Assessing the future path for global interest rates
- Bond Watch: why the Bank of England has a big decision to make next week
The FTSE100 bucked the global trend in opening exchanges and opened marginally higher, albeit unconvincingly, reversing the gain almost immediately.
A number of stock specifics helped lessen the blow, such as Mondi (LSE:MNDI)’s disposal of its last Russian facility for €775 million, well-received numbers from Phoenix Group Holdings (LSE:PHNX) and a broker upgrade to Ocado Group (LSE:OCDO) ahead of its quarterly results tomorrow. T
The premier index is now ahead by 3.4% this year, which is something of an improvement over recent weeks, while the FTSE250 continues to be dogged by the UK economic outlook and is down by 0.5%.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.