Market snapshot: stagflation concerns on the agenda

With global stock markets reeling from the fast-moving situation in Ukraine, our head of markets rounds up the key issues at the start of the week.

A US employment report which would normally have stolen the headlines was entirely overshadowed by further developments in the European conflict.

The non-farm payrolls report showed that 678,000 jobs had been added, against expectations of 400,000, while the unemployment rate also improved by more than had been expected to stand at 3.8%, not far from pre-pandemic levels. Such strength in the US economy was of little comfort to investors.

First of all, in isolation the numbers do little other than leave investors driving in the rear view mirror, while the primary concern at present quite simply is the emerging ramifications from the Russia/Ukraine conflict.

Nor does the worsening inflationary picture provide an inviting backdrop for investors. The flight from risk assets such as equities has left the Dow Jones down by 7.5% in the year to date, the S&P500 by 9.2% and the Nasdaq by 15%.

Commodity and energy prices have inevitably experienced upward pressure, with escalating sanctions against Russia and the shuttering of some Ukrainian ports driving the search for replacement supplies of crops, metals and energy. 

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Further suggestions that the Biden administration is considering an embargo of Russian oil supplies continued black gold’s stratospheric rise, with the oil price now having gained 66% in the year to date.

The current backdrop is also stoking stagflation concerns, with rising inflationary pressure unlikely to be offset by sufficient global economic growth to prevent a stagnant environment. This in turn has led to one of the few positive possible outcomes from the conflict, namely that central banks may need to consider reining in their increasingly hawkish attitudes to interest rates in light of a further blow to global economic recovery.

China has also taken a red pen to its estimates, cutting its economic growth target to around 5.5% for next year, while also increasing its military spending by 7.1%, both in recognition of the unfortunate direction which is currently playing out.

Against this backdrop, the FTSE100 has been unable to sustain its previous progress and, quite apart from moving into negative territory last week, the further deterioration in sentiment has again dealt a blow to prospects in early trade. 

Previously sought as something of a refuge by international investors in the early part of the year, appetite for equities is quickly evaporating and the FTSE100 has now lost 6% in the year to date, marking a noticeable swing from its previous 2022 highs.