US stocks are setting the pace, but there are big events ahead keeping many on the sidelines. Our head of markets explains why and assesses activity on global exchanges.
Some strength in technology stocks was a rare feature in a tepid trading session on Wall Street, as investors largely kept their powder dry ahead of an important week to come.
Amazon.com Inc (NASDAQ:AMZN) helped drive tech shares higher following some favourable analyst commentary, with the Nasdaq index now ahead by 26.5% in the year to date. However, the rise of big tech, which has also helped propel the wider S&P500 up by 12% and unofficially into a bull market since its October lows has caused some concern.
The rally has mostly been concentrated within just a handful of stocks, with the narrowness potentially masking a weaker picture among the wider market. Indeed, the more traditional Dow Jones has been unable to forge meaningful gains in the year to date, and trails the other main indices with a rise of just 2%.
Further colour will come next week, as investors await the latest inflation report and then the Federal Reserve decision on interest rates. Core inflation is expected to remain elevated, although an overall cooling should provide some relief. A slightly higher than expected initial jobless claims number could also inform the Fed’s decision, where it is largely expected that there will be no rate rise announced next week, but where the possibility of a July hike seems increasingly likely.
The decisions will remain data dependant, with investors urging the need for caution rather than complacency in anticipating the Fed’s next move. This follows surprise rate hikes earlier in the week in Australia and Canada, showing that untamed inflation and the potential for subsequent recessions remains a live issue. In the meantime, the so-called “fear gauge” which reflects volatility fell to post-pandemic lows, indicating a lack of willingness from investors to become involved ahead of next week.
Asian markets were mostly positive, with the Nikkei rebounding strongly after a previously weak session. The index is close to the highs which it achieved over recent days, pushing the Japanese market to levels not seen since 1990.
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In China, there was also a tick higher, despite some further economic data which threw more cold water on the demand story. The economy had a good first quarter following the reopening, but has subsequently stalled with recently weak import and export numbers being followed by a fall in factory gate prices, with faltering demand weighing on the manufacturing sector.
There is increasing speculation that the authorities in China could step in to revive the recovery, particularly among consumers. Meanwhile, simmering tensions between the US and China are also keeping a lid on sentiment, and with various issues such as security concerns seemingly never far from the surface.
Investors in the UK were similarly non-committal at the open, with marginal gains coming through as a nod to the reasonable sessions seen in the US and Asia. There was some movement in the pharmaceutical and financial sectors, although neither could gain any real traction in early exchanges.
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The news from across the pond next week will potentially bring a fresh sense of direction and clarity on current central bank thinking, and with the premier index having a large bias to overseas stocks and the US in particular, any reverberations will be felt domestically.
The FTSE100 remains some way off the record highs achieved in February and has now added just 2.2% in the year to date, although this could bring some renewed interest in the blue chip index, if only on valuation grounds where the UK is seen as cheap compared to many of its international peers.
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