Market snapshot: storm clouds gathering

There are increasing signs of storm clouds gathering over markets, with little relief from the building wall of worry.

Already grappling with stretched stock valuations in the AI space, an unresolved government shutdown and a deteriorating relationship between Beijing and Washington, investors were exposed to a new source of concern in the form of lending practices and bad loans for US regional banks.

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Of themselves, the credit losses announced by two regional banks were limited and seem to be contained. While there are hopes that this could be an isolated incident, the episode brought back unwelcome memories of the Silicon Valley Bank collapse in 2023 and, with several regional banks yet to report, investors are on high alert. Indeed, despite there being no obvious read across to the large banks, the reports were enough to put the skids under the sector as a whole, with losses of around 3% more or less across the board.

Meanwhile, the economists have their hands tied in the absence of data resulting from the shutdown. Of the limited reports which are trickling through, it is increasingly evident that the labour market has overtaken inflationary concerns in the minds of the Federal Reserve. It remains to be seen whether the current consensus of two further interest rate cuts this year, including a potential bumper cut of 0.5%, proves to be hope rather than expectation.

The increasingly toxic combination provided an excuse, if it were needed, to light another fire under the gold price which has now risen by 65% this year alone and where momentum into haven destinations generally has taken on increasing importance in investor allocations across asset classes.

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Nor is the discomfort showing any signs of having peaked for the moment. At this very early stage, Dow futures are indicating falls of a similar magnitude for the open later today as investors remain skittish heading into the weekend. This week’s uncertainty has sapped some strength from the major indices, although for the time being gains of 8%, 12.7% and 16.8% for the Dow Jones, S&P500 and Nasdaq respectively in the year to date leave the optimists in the driving seat.

The developments weighed on Asian markets overnight, especially in China, and the bearish baton was passed to the UK in opening exchanges. Investors switched squarely into risk-off mode, with the FTSE100 suffering opening declines of around 1.4% as a broad markdown brought recent progress to a temporary halt. Pearson was a rare exception following a well-received third-quarter trading update, but the downward pressure was evident as most sectors reacted to the growing global unease.

The UK banks were at the eye of storm following the US regional bank read across, ahead of their own third-quarter reporting season which begins next week with updates from Barclays (LSE:BARC), Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG).

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ICG (LSE:ICG) was the top faller given its private equity focus, while the US tech pullback weighed on the likes of Polar Capital Technology Ord (LSE:PCT) and Scottish Mortgage Ord (LSE:SMT). Some of the recent high flyers such as Babcock International Group (LSE:BAB) and Rolls-Royce Holdings (LSE:RR.) also found themselves at the mercy of some profit taking.

Despite a reasonably ugly open, the FTSE100 remains ahead by 13.8% so far this year, and it remains to be seen whether its reputation as an alternative haven destination can be restored in the coming few trading sessions given the wider malaise.