Market snapshot: UK avoids recession but global investors still cautious

Stock markets have clawed back some of last year's losses, but remain volatile. Our head of markets has the latest developments and explains what they mean for investors.

Another volatile session saw attempts at a renewed rally peter out sharply in the last hour of trading on Wall Street overnight.

The initial boost to stocks came in the form of better than expected earnings from such household names as The Walt Disney Co (NYSE:DIS) and PepsiCo Inc (NASDAQ:PEP). The earnings season as a whole, which is now around two-thirds completed, has seen the majority of companies beating earnings expectations, but with earnings having fallen nonetheless. At the same time, a growing mantra of cautious company outlook statements has reflected that trading conditions are becoming tougher on the ground.

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There has been much to digest for investors of late, which has been part of the reason for the volatility. A band of optimists believing that not only are interest rates near peaking, but also that there may even be rate cuts before the end of the year are looking increasingly likely to be disappointed, and throughout several Federal Reserve speeches this week, there has been no sign that the central bank is looking to change path until inflation is tamed, albeit with hikes at a slower rate.

Next week, the release of the latest inflation number on Tuesday should shed further light on whether disinflation has taken hold as many had hoped. In the meantime, further Fed speeches are due as well as a sentiment gauge which are likely to underline the fine balancing act between tightening monetary policy, unstable consumer sentiment and the severity of the ensuing recession should the coveted soft landing be missed.

The more recent caution has done little to hamper what has otherwise been a strong start to the year, however, with the feeling of some release from tightening monetary shackles boosting riskier asset classes such as stocks. In the year to date, the most notable recovery index in the US has been the Nasdaq, which has added 12.6%, while the benchmark S&P500 is ahead by 6.3% and the Dow Jones by 1.7%.

The mood in Asian markets was also wary, with factory gate price numbers from China falling more than expected, suggesting that the expected strength of the economic rebound has yet to take hold. While there has been some renewed activity at the consumer level, there is also a suggestion that there is insufficient confidence yet for the purchase of larger ticket items, especially housing and cars. “Dr Copper” is often consulted as a gauge for consumer prospects and demand and although the price remains comfortably ahead in the year to date, it has more recently retreated slightly in what could raise questions on the strength and speed of the anticipated Chinese recovery.

Much as expected, the UK avoided a technical recession by the narrowest of margins, as growth flatlined in the latest quarter following a drop of 0.3% at the previous reading. However, December saw a dip of 0.5% and the outlook for 2023 remains downbeat as stagnating growth, industrial action, rising interest rates and increasingly brittle consumer confidence all conspire to dampen prospects.

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Even so, the UK economy has proved more resilient than expected thus far, as represented by a domestically focused FTSE250 which is now ahead by 7.1% this year, after a torrid 2022 which saw the index fall by 20%.

The FTSE100 also succumbed to the wider global caution which arrived overnight, with some of the more risk-on sectors such as the miners seeing some early pressure. There was also some weakness among banks, where Barclays kicks off the full-year reporting season next week, and where thoughts will likely turn to economic prospects, the possibility of heightened loan loss provisions and the general direction of shareholder returns which had been showing some improvement.

In the meantime, the FTSE100 is also ahead by 5.7% in the year to date, even though the sharp dip in Standard Chartered (LSE:STAN) shares after a rumoured bidder denied involvement cast a shadow over the index.