Market snapshot: stocks sink amid a toxic cocktail of fears

Global sentiment is both skittish and volatile, with a report of possible 18% inflation in the UK contributing to the deteriorating outlook, writes our head of markets. 

Global markets slumped amid a toxic cocktail of fears around inflation, possible recession and further shortages of energy supplies.

US markets were in the firing line, with some of the recent strength evaporating ahead of the Jackson Hole symposium later in the week.

There is perhaps a growing realisation that the Federal Reserve will remain unmoved by recent data, which suggested that inflation could be peaking and maintain its aggressive policy. Investors unsettled by a new round of tightening are increasingly returning to the conclusion that the next Fed hike in September will be another rise of 0.75%, with the consensus having been for a lighter 0.5% over recent sessions.

• Discover: How to buy Shares | Free regular investing | Super 60 Investment Ideas

The inversion of the yield curve also widened further, suggesting that the likelihood of recession is increasing at an alarming pace. Growth stocks, which had received some buying attention on the back of improving prospects were worst hit, as investors hunkered down and sought haven assets such as the US dollar.

After a decent few weeks, the Nasdaq bore the brunt of the selling pressure and slipped back into bear market territory, now down by 21% in the year to date. The S&P 500, also with a large technology constituent bias, is down by 13% and the Dow Jones by 9%.

Asian markets were also ruffled by these recessionary fears, quite apart from the local issues that are also weighing on sentiment.

While the Chinese central bank is the exception to the generally tightening monetary trend, the challenges are mounting. The property sector is ailing, the services sector is also suffering from the country’s zero-tolerance Covid-19 policies, while power outages in some key manufacturing hubs adds to the list of factors threatening to derail any hopes of a shorter-term economic recovery.

• Insider: FTSE 250 boss backs shares to pick up speed
• Read more of our content on UK shares here
• 20 ‘quality’ stocks backed for tougher times

A renewed spike in energy prices in Europe and a report which suggested the possibility of a horrific spike of 18% inflation in the UK also contributed to the deteriorating sentiment, with the FTSE 100 opening in negative territory. Amid a general markdown, house-builders were under renewed pressure given the likelihood of further aggressive tightening by the Bank of England and a deteriorating consumer environment.

The premier index remains ahead by 1.6% in the year to date, underpinned more recently by sterling weakness. This does not reflect prospects for the UK economy, however, as evidenced by the rather more domestically focused FTSE 250, which is now down by 17% so far this year.

For the moment, global sentiment is both skittish and volatile. There is little cause for optimism on the immediate horizon, with any glimmers of economic hope yet to take hold on a sustainable basis.