Market snapshot: stocks rally despite mixed messages globally 

Wall Street rallied overnight, but our head of markets warns investors not to get too excited.  

Investors took some solace from an oil price under pressure, which could at the very least ease some of the current inflationary pressure.

In June, oil was trading at over $121 per barrel and is now slightly under $89. While the present price still represents a hike of 14% in the year to date, attempts by the authorities to manage the price have seen some success, as an expected slowdown in global demand has offset potential supply shortages, especially from Russia.

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Alongside the drop in the oil price, US Treasury yields also took a pause for breath, sending each of the main indices sharply higher - the Nasdaq tech index snapped a seven-day losing streak with a 2.1% gain - but still significantly south of their opening levels of 2022. In the year to date, the Dow Jones has retreated by 13%, the S&P500 by 16.5% and the Nasdaq by 25%.

The relief could be short-lived, however, with additional comments from Federal Reserve members reiterating the central bank’s current stance, who noted that while some moderation in inflation of late was welcome, it would be several months before a trend can be established.

In the meantime, the economy is showing few signs of wilting and curbing inflation remains the Fed’s absolute priority. Its latest summary came in the form of the “Beige Book” release, in which the Fed noted that economic activity was little changed in many regions across the country, although the outlook for growth remains weak. Even so, the likelihood of a further hike of 0.75% at the September meeting is now widely priced in by the market.

Separately, analysts have been taking the red pen to earnings estimates for the current third quarter. Expectations are for a fall in earnings of between 3% and 5%, whether the US enters a recession or not, as the effects of inflation continue to crimp margins, alongside waning sentiment among consumers which are such an integral driver of economic growth.

The estimate declines are slightly sharper than has been the case of recent quarters, and will be continually revised as the end of the quarter approaches over the next few weeks.

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In response, Asian markets were generally mixed to positive, although Chinese equities failed to join the rally. Trade data released yesterday revealed a worse than expected result, while an extension of the Chengdu lockdown underlined the country’s zero tolerance on Covid-19, which itself has added to worries around consumer sentiment and any recovery in economic growth.

In the UK, the announcement of government measures to cap energy bill rises is expected imminently. While any such measures are likely to be welcomed warmly by consumers, with sectors such as retail and housebuilders showing some strength in anticipation of a potential easing of the cost of living crisis, the effect has been negative on sterling.

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An estimated cost to the government which is likely to exceed £100 billion has raised some concerns within the debt market, given that the trade deficit is already standing at record levels. The additional headwinds of declining consumer confidence, persistent inflation and an almost inevitable recession add to an increasingly dour outlook for the UK in the short and perhaps even medium term.

The FTSE100 has also succumbed to globally declining sentiment in recent sessions, despite posting a marginal gain in early exchanges. The index is now down by 1.7% in the year to date, which nonetheless remains a respectable performance in comparative terms.

The weakness of sterling has underpinned some positive prospects for the index, although the more recent pressure on commodity prices generally has removed a prop which had largely enabled the index to remain above water for much of this year.