Market snapshot: stocks tread water as investors wait for Fed signal

These are testing times, with many investors sitting on their hands, says our head of markets,

With investors for the most part sitting on their hands ahead of the imminent Jackson Hole symposium, markets failed to make much progress.

Comments from a Federal Reserve official underscored the likelihood that the central bank will not be diverted from its aggressive tightening policy before inflation comes down to a more manageable level. The changing narrative among investors is that even if the Fed succeeds in engineering a soft landing for the US economy, rates could remain at elevated levels for longer, and until such time as the battle with inflation has been beaten beyond a doubt.

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In the meantime, some weaker economic news feeding through from manufacturing and economic surveys and new home sales were the latest data points potentially suggesting some slowing of the US economy as the rate rises undertaken so far begin to wash through. Even so, the expectation remains for a 0.75% hike in September as the Fed continues its determined march against higher prices.

The reset of expectations has put the skids under what had been something of a recovery rally for the major indices, which remain well short of their opening 2022 levels. In the year to date, the Dow Jones is down by 9%, the S&P 500 by 13% and the Nasdaq by 21%.

Asian markets were also unable to shake off the general air of malaise amid a faltering Chinese economy, which is battling with lockdown restrictions, a struggling property market and lower consumer confidence. Despite some signs that the central bank stands poised to lend some assistance to the property sector in particular, doubts remain over whether the measures shown so far are anywhere near sufficient.

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From a global perspective, these are testing times for investors and consumers alike. For the latter, higher borrowing as well as living costs are battering sentiment, with the growing risks of recession in many developed companies further darkening the outlook. The pressure will also remain heavy at the corporate level, where despite the resilience many companies have shown during the recent quarterly reporting season, expectations remain that earnings expectations will need to be revised down as general pricing pressures remain.

Against this backdrop, there are additional pressure points within the UK economy, which has led some to predict a further sharp rise in inflation even from the current high levels. The energy price resurgence and increasing tightness in the labour market, another potentially inflationary factor, has led to concerns as to the severity of a recession in the coming months. At the same time, the Bank of England is also set to maintain its assault on inflation with further rate hikes which, set against tepid growth, will exacerbate the situation. Seen as the UK barometer on prospects, the FTSE 250 has lost 18% in the year to date.

For the premier index, inaction was again in evidence as the FTSE 100 struggled to make any meaningful headway in early exchanges. Increasingly hemmed in by the challenges of overseas economies from which its companies derive most of their income, its 1.2% rise so far this year has been mostly driven by rising commodity prices in general and a weaker sterling, which heightens the value of those international earnings. Some additional defensive support among its constituents alongside a strong average dividend yield has also proved to be of some attraction to global investors seeking a different investment destination.