Market snapshot: sombre mood as stocks dive again
11th October 2022 08:16
by Richard Hunter from interactive investor
The list of negative catalysts affecting global stocks remains a long one, and share prices are still falling. Our head of markets looks at the events shaping performance Tuesday.
The growing list of concerns with which investors are grappling has led to further market weakness in the absence of any respite.
The latest semiconductor restrictions are a reminder of the fractious relationship between the US and China, while the fresh escalation of hostilities in the Russia and Ukraine war add to an already brittle sentiment. Alongside the existing recessionary fears following on from the Federal Reserve’s stubbornly aggressive policy in raising rates to tackle inflation, for the moment there seems to be little light at the end of the tunnel.
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The latest trading session reflected the mood, with the Nasdaq again taking the brunt on the two fronts of the semiconductor issue and a rising interest rate environment, which crimps valuations and adds to the cost of raising capital.
The tech index hit its lowest close since July 2020 and is now down by 33% in the year to date. Tech stocks also feature heavily in the benchmark S&P500 index, which has declined by 24% so far this year, while the more traditional Dow Jones Industrial Average remains down 20%.
With the bond market closed for the Columbus Day holiday, trading was lighter than usual, with investors unable to measure the effect on Treasury yields from the latest developments. Meanwhile, further comments from Fed members reiterated the determination to combat inflation, while accepting that the effect of the rate rises hitherto would not fully be seen for some months to come. Minutes from the latest policy meeting are released tomorrow and will be scanned for the latest thinking on the immediate economic outlook.
The onset of the third-quarter reporting season will also provide some more colour to conditions on the ground, with the banks being a significant barometer. Share prices may have spiked earlier in the year in the face of rising interest rates – a traditionally favourable backdrop for banks – but have since come under pressure as growing recessionary fears inevitably lead to the possibility of growing loan defaults.
Coupled with a volatile trading environment which is likely to have choked investment banking income, and with the possibility of cooling demand for car loans and mortgages, the expectations are that the banks will be revealing significantly lower quarterly profits.
The generally sombre mood was also evident in Asia, where China has had the semiconductor restrictions to its own list of challenges, such as deteriorating consumer sentiment, the impact of Covid-19 lockdowns and an embattled property sector. Meanwhile, Japan reported that its current account surplus had declined by over 95% compared to a year ago, with more expensive imports caused by a weaker yen outstripping export growth.
The UK economic picture was further clouded by the release of employment data which revealed a decline in the unemployment rate to 3.5%, its lowest level since 1974. However, this could embolden the Bank of England to maintain its own aggressive hiking policy, while the underlying decline in real wages due to inflation could itself lead to further tightness in the jobs market, complicating an overall outlook where the economy is still expected to hit recessionary levels sooner rather than later.
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The FTSE250 and sterling also wobbled further as a result, with the former now having declined by 27% in the year to date.
The FTSE100 was unable to sidestep the investment gloom, with a dip in early exchanges which leaves the premier index down by 6% so far this year. Some solace was provided by broker upgrades to the likes of Next (LSE:NXT) and Centrica (LSE:CNA), although weakness in the broader financials and retailers put pay to any immediate thoughts of investor respite.
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