Market snapshot: a sharp reversal of fortunes

US markets fell overnight in a turbulent trading session which saw a sharp reversal of fortunes on a number of fronts.

The day began positively after the jobless claims reading came in higher than expected, which spoke to the narrative of a further reason for interest rate cuts. However, subsequent comments from several Federal Reserve officials cast aspersions on the current situation, with one suggesting that if inflation continues to track sideways the need for any rate cuts whatsoever this year could be called into question. Another quoted outsized price increases in housing services as being a major barrier in the fight against inflation, while in the background strong wage growth brings its own price pressure.

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The situation was then compounded by another inflationary input in the form of the oil price. Escalating tensions in the Middle East pushed the price higher to stand ahead by 18% in the year to date, which added to the nervousness and left the main indices lower in what has been a relatively bruising start to the new quarter.

The imminent company results reporting season now carries additional responsibility in ensuring that the increasingly elevated valuations of US stocks can continue to be justified, among increasing calls that after a breathless few months there could be some form of correction to come. The main indices have each had a strong start to the year, with the Dow Jones up by 2.4%, the S&P500 by 7.9% and the Nasdaq by 6.9%.

In the meantime, the widely anticipated non-farm payrolls report later could add to volatility and investor unease should another blowout number be confirmed, which would throw further doubt on the likelihood of rate cuts. The consensus is that 200,000 jobs will have been added in March, as compared to 275,000 the month before, with the unemployment rate likely to remain stable at around 3.9%. Taken in the context of the previous Fed member comments, a hot reading would exert further sharp downward pressure on sentiment and therefore share prices.

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Asian markets switched to a risk-off mode following the developments in the US, with a holiday in China adding to thinner trading conditions and thus the possibility of higher volatility. 

In Japan, a strengthening of the yen ahead of possible monetary tightening from the central bank put additional pressure on the main index. An official commented that the bank could respond with monetary policy if the currency continues to impact inflation, largely through a recent round of significant pay rises, and where he expected inflation to accelerate between the summer and autumn periods.

Inevitably the bearish baton was passed on to the UK, where the FTSE100 opened markedly lower. The decline moves the index away from testing its recent highs once more, although remaining ahead by 2% so far this year.

The risk-off approach was reflected by some weak performances among the miners, although the oil majors marginally kept their heads above water given further strength in the underlying commodity. Scottish Mortgage Ord (LSE:SMT) was under some pressure given its exposure to US technology, while more generally there were few havens even among defensive shares as a red pen was applied virtually across the board.

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The domestic barometer of the FTSE250 was also unable to escape the markdowns, with its decline erasing some of its more recent resilience and shaving its increase in the year to date to just 0.2%. While the US indices have clear headway to let some air out of the tyres given recent strong gains, the UK market is currently out of investment favour, meaning that it has so far trailed on the upside but is unlikely to escape any downward correction pressures coming from overseas.