Market snapshot: risk appetite returns, but for how long?

Buyers returned both in the US overnight and in the UK this morning, but stock prices remain volatile. Our head of markets reports.

Risk appetite has briefly returned for investors on Wall Street, although sentiment remains delicately poised.

Progress on debt ceiling talks in the US seems to suggest a temporary deal to avoid default, which gave markets a shot in the arm as the trading session progressed. At the same time, indications that Russia may be stepping up gas supplies also steadied energy prices, which have been the main culprit for the volatility which is currently being experienced.

The spike in energy prices has unsettled investors both from a growth and an inflation perspective. Concerns about the timing of the Federal Reserve taper of stimulus measures have been thrown into further disarray as higher energy prices could both crimp economic growth but also feed inflation, which is already at elevated levels.

This in turn leads to the question of whether inflation will be more permanent than initially hoped, and whether some policy adjustment will therefore be required. It also brings the issue of interest rate rises to the fore, while the spectre of stagflation also comes into play, with potentially lower growth and higher prices.

Despite the volatility, the bounce in share prices has enabled the main indices to reverse losses from earlier in the week and in the year to date, the Dow Jones is up by 12.5%, the S&P500 by 16.2% and the Nasdaq by 12.5%.

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UK markets have also regained some ground, although as yet unable to recover the losses of the last few trading sessions. 

The spike in natural gas prices is seen as having a more profound impact in European economies and any resultant restriction on growth would negatively impact the largely cyclical constituents to be found within the premier index. At the same time, the perceived slowing of momentum in the UK economic recovery, particularly given the removal of various government support schemes, has had a notably damaging effect on the more domestically focused FTSE250.

The return of risk appetite, which may itself yet prove transitory, has fed through to a generally stronger opening, with potential growth sectors such as the miners and the housebuilders in focus.

The main UK indices have lost some ground on the levels previously achieved over the last few months, but remain ahead in the year to date, with the FTSE100 having added 9.5% and the FTSE250 10.5%.

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