Some big events this week could determine whether there is any scope for the broader market to catch up with the strength shown by the tech stocks. Our head of markets has the latest.
Markets drifted higher at the end of last week, with the hiatus prior to an important few days giving investors the opportunity to consider other emerging factors.
This week will be dominated by an inflation release and whether the Federal Reserve’s interest rate decision will be informed by its findings. Core inflation is likely to remain elevated, although there could be some signs of cooling within the numbers, with the current consensus still that rates will be paused this month, with the possibility of what could be a final hike in this cycle in July.
In the meantime, investors have been pondering whether recent market rallies are justified and also fretting about the concentrated nature of this strength, which has largely been driven by a handful of mega-cap technology stocks, muddying the overall picture.
By some measure, the tech-exposed benchmark S&P500 is now in bull market territory, having risen by more than 20% from its October lows, and having added 12% so far this year. Meanwhile, the Nasdaq index has raced ahead by 27% this year although remaining some 17% away from the all-time highs of November 2021.
The question now is whether there is any scope for the broader market to catch up with the strength shown by the tech stocks. The more traditional Dow Jones has added just 2.2% this year, while the mid and smaller cap equities have yet to join the party.
There may be an increasing belief that should the US economy continue to show its current resilience, even in the face of an aggressive hiking regime, that a broader mark-up may be justified. This would in turn underpin sentiment, with the Fed being seen to be towards the end of a campaign of rising rates. Next question is whether the moves hitherto prove to induce a recession, and how deep any such recession could be.
Asian markets were cautiously positive on the whole, although slightly pegged back by both the imminent US releases and also a week which will bring interest rate decisions from both the ECB and Bank of Japan. The surprise hikes from Australia and Canada last week proved to be a reminder that the battle against inflation is ongoing in some countries, while the region has been considering the differing fortunes of two of its largest markets.
On the one hand, Japan has been on a tear, with the Nikkei hitting multi-decade highs and the latest inflation reading suggesting little pressure for a rise later in the week. China, on the other hand, has seen a raft of economic data, which has pointed to a stalling recovery amid high hopes for a prolonged rebound from the world’s second largest economy. Hopes abound for some policy stimulus from the authorities in what could prove an important week, with releases due on credit lending, industrial output and retail sales.
The FTSE100 opened on the front foot, buoyed by the more positive noises coming from the US given its exposure to overseas earnings from that area in particular. In early trade, the beleaguered Ocado Group (LSE:OCDO) spiked on a broker upgrade, even if the stock remains down by 34% in the year to date and having narrowly missed relegation from the FTSE100 in the latest reshuffle. There was also some tentative buying interest in the retailers, although the miners found it difficult to make ground.
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The index has however failed to respond in a meaningful or sustained way to any recent rallies and stands ahead by just 2% in the year to date, and some 5% lower than the record high of around 8,000 achieved in February.
The weakness of an oil price which has declined by 14% this year and the possibility of increased loan defaults, have weighed on the oil majors and the banks respectively. Meanwhile, miners have had a rollercoaster year given the waning fortunes of the Chinese economy which could impact demand.
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