Share prices continue to nudge higher, continuing their recovery from the banking crisis, but our head of markets has a word of caution ahead of the long weekend.
Growing recessionary concerns cast a pall over markets, with further economic evidence of weakness.
A number of US releases suggested that the economy is beginning to wilt under the pressure of the Federal Reserve’s aggressive hiking policy, with attention now turning to the scale of a recession, rather than whether one will happen.
Weakness was seen in demand for home loans, activity in the services sector and a private sector number which was comfortably shy of expectations.
The most eagerly awaited economic release of any given month is the non-farm payrolls report, which is still due on Friday despite the market being closed for Easter. The expectation is for 240,000 jobs to have been added in March, following a blowout number in January and a higher than expected 311,000 number in February.
The closure of the market on Friday means that equity traders will be unable to react to the release until next week which, coupled with the long weekend, has seen some traders squaring positions and being unwilling to open new ones given the extended break. This lack of buying interest also weighed on the US indices, with the exception of the Dow Jones, which eked out a small gain given its constituent exposure to more defensive sectors such as healthcare.
The recent banking turmoil has added another dimension for the Fed to consider prior to its next meeting in May. In addition to the difficulty of gauging whether the time lag and cumulative effects of rate rises are now in play, the possible tightening of credit conditions by banks could heighten the cost of borrowing for both consumers and companies. In turn, at a corporate level this could weaken balance sheets and damage profits. With such a backdrop in play, investors are evenly split between a small hike in rates and a pause at next month’s meeting.
In the meantime, the main indices are holding on to some of the gains made so far within this volatile environment, and in the year to date the Dow Jones remains ahead by 1%, the S&P500 by 6.5% and the Nasdaq by 15%. The latter is buoyed by big tech companies which tend to be partly shielded from a downturn based on generally low debt levels and growth from the essential services they provide.
Asian markets were hampered by geopolitical rather than economic concerns, as China threatened a “resolute response” to the visit of the US House Speaker to Taiwan. The fractious relationship between the world’s two largest economies is never far from investors’ minds, and the latest development was enough to unsettle sentiment, despite some stronger economic readings, most notably a further accelerating services sector in China.
Market mood music in the UK was also wary, with the FTSE100 posting a tentative gain in early exchanges. Gains were fairly evenly spread but contained, with some elements of a risk-on approach in evidence via the mining sector, and something of a rebound for some insurance stocks, which have recently been under pressure.
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Meanwhile, the housebuilders continue to attract attention given a potentially slowing market, although with differing results as the likes of Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) moved in opposite directions. The premier index remains in positive territory for the year, holding on to gains of a touch over 3% despite the falls seen since the recent all-time high in February.
The FTSE250 remains relatively lifeless with a decline of 1.5% in 2023, wiping out all of the optimism from earlier in the year. The cost of living crisis is beginning to show some real effects, such as recent retail numbers which suggested that consumers are now prioritising essential rather than discretionary spending, in turn exacerbating what was already anaemic growth set against a high inflationary environment.
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