Market snapshot: seesaw session on Wall Street and losses in London

Stocks remain volatile as US companies start releasing eagerly awaited quarterly results, while UK peers also struggle to make gains stick. Our head of markets reports. 

A seesaw session in US markets ended in the red, with investors lacking conviction despite a couple of bright spots.

PepsiCo Inc (NASDAQ:PEP) kicked off the reporting season in positive mode, not only reporting better than expected profit numbers, but also raising its revenue outlook for the year as a whole. Airline stocks also flew higher after American Airlines Group Inc (NASDAQ:AAL) reported that it expects total revenue in the second quarter to exceed that seen in 2019. The news read across to the other airlines, including Delta Air Lines Inc (NYSE:DAL) who report today.

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The main focus for investors now switches again to inflation, with the release later of the consumer price index for June. The headline reading is expected to rise further to 8.8%, up from 8.6% in May, further underlining the likelihood of a continuation of aggressive monetary tightening by the Federal reserve.

Even so, among the consensus are economists who are quietly hoping that this reading could mark the level of peak inflation, with the rate of acceleration starting to wane.

The challenges for investors this week do not end there, as the banks take centre stage on Thursday and Friday. The level of impairments will be closely monitored, with a marked jump potentially foreshadowing a recession. At the same time, the banks are up against tough comparatives given a release of impairments this time last year, while a softer home sales and mortgage market may also persist from the previous quarter.

Further areas of interest will centre around equity trading revenue following volatility in the broader market, and investment banking which has seen something of a slowdown in new issues as many companies having chosen to delay listing at the current time.

For the reporting season as a whole, expectations are generally low. It is possible that the majority of bad news has been priced in – aggressive Fed tightening, soaring inflation and slowing growth have been in plain sight for some time now, and markets have repriced accordingly.

In the year to date, the Dow Jones has lost 15%, the S&P500 20% and the Nasdaq 28%.

However, what happens next will be largely (but not totally) driven by company results and by outlook comments in particular. As evidenced in the last quarter, earnings misses and cautious guidance projections were severely punished and there seems little reason for that to change this time around.

Asian markets also fluctuated, generally slipping on newsflow. Interest rate rises of 0.5% were announced by both South Korea and New Zealand as a reflection of global inflationary concerns, while in China the highly transmissible Omicron subvariant has set the country’s economic recovery back given its zero tolerance policy.

With further lockdowns either in place or imminent, many of China’s trading hubs find themselves hamstrung once more. The potential lack of demand from the region has also impacted the oil price which, alongside further pressure given the strength of the US dollar, has retreated sharply from the highs seen earlier in the year, although remaining ahead by 28% in 2022.

A relatively rare economic bright spot came in the form of the UK GDP reading, showing that the economy grew by 0.5% in May after contractions in March and April, and better than the zero growth which had been expected.

Nonetheless, economic data points cannot be taken in isolation, such that the number does little to change the overall economic dial for prospects in the UK. With sterling under pressure in part due to the strength of the dollar, the FTSE250 fought bravely to eke out a marginal gain at the open, although the index remains down by 20% in the year to date.

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The FTSE100 also stumbled slightly in early trade, in line with global markets. Sentiment remains fragile given the current backdrop, and early features included general pressure on financial stocks, while a number of broker downgrades had stock specific impact. The UK’s premier index is now down by 3% in the year to date, representing an outperformance relative to many of its global peers.

The UK as a whole is still seen as being undemanding in terms of valuation, and while international interest has cooled of late, the possibility for further cherry picking cannot be entirely ruled out as investors continue in their search for stability and of course returns.