After an incredible bull market, global stock markets have beat a hasty retreat from recent highs. Our head of markets explains what's triggered the latest wave of selling.
More gloom is descending as investors digest some major earnings disappointments, adding to concerns of an accelerating monetary tightening schedule.
The Nasdaq index has taken the brunt of the selling pressure this year, initially prompted by a rotation to value stocks, but lately exacerbated by some earnings misses which have left the index down by 9.5% in the year to date, and in correction territory being down by over 10% since the recent November high.
The latest catalysts for another downward lurch came from Netflix (NASDAQ:NFLX) and Peloton (NASDAQ:PTON). The former announced weak subscriber growth which was far short of expectations, and potentially as a result of the post-pandemic boost evaporating, alongside increased competition from the likes of Disney (NYSE:DIS) and HBO. The shares fell almost 20%. Peloton, meanwhile, announced that it was halting production for February and March to adjust for lower demand, sending its shares down by 24%.
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The news played into investor concerns that the pandemic-related demand for consumer goods was not sustainable, and was another reminder of a recent and weaker than expected retail sales number. It also raised question marks over whether the current reporting season will provide enough positive surprises to lift the mood.
In the meantime, heightened treasury yields are also eating into potential future earnings expectations, particularly high growth stocks such as big tech. The Federal Reserve meeting next week will provide some of the latest thinking as to how aggressively they plan to dial up the tightening, both in terms of winding down its balance sheet as well as raising interest rates.
Quite apart from the Nasdaq, this uncertainty has also weighed heavily on the other main indices in the year to date, with the Dow Jones having fallen by 4.5% and the S&P500 by 5.9%.
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Despite a reliance on cyclical sectors such as major oil stocks and the banks, and with a recent tailwind arising from some M&A froth in the pharmaceutical space, the FTSE100 index is not immune from the deterioration in sentiment and has opened on a weaker footing.
Late weakness in US markets followed through to Asian indices and the UK has been unable to dodge this particular bullet. For the moment, sentiment is dominating investor behaviour, with few positive catalysts visible on the immediate horizon.
For the UK, there may be something of a short term boost to the economy after the loosening of the latest variant restrictions, but inevitably these will take time to feed through. Consumer sentiment will also face the challenge in the coming months of further rises in energy prices and forthcoming tax hikes.
The FTSE100 may be weakening its grip as one of the few major markets in positive territory for the year, currently clinging to an increase of just 1.7% in 2022.
The next few weeks are becoming increasingly pivotal in setting the scene for the medium term, both in terms of corporate earnings as well as the equally important outlook and guidance statements coming from those companies on the ground.
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