Market snapshot: UK captures attention for wrong reasons

Another day, another round of volatility on global stock markets as previous gains are unwound and London threatens to end the week on a gloomy note.

Stocks stumbled again on new rate concerns, although on balance markets look set to finish the week marginally ahead.

After being up by almost 400 points at session highs, the Dow slipped to end down by 90 points. Speculation emerged that the Federal Reserve could be more aggressive than the generally accepted view, with a possible terminal interest rate of 5% spooking bond investors. The yield for the benchmark 10-year Treasury rose to a high of over 4.2%, a level not seen since 2008, meaning hopes that the more recent attempts at a sustained equity market rally may be ill-founded.

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Further comments from the Fed showed no signs of an attention to moderate, with rises of 0.75% expected for November and December, and the additional possibility that such rises may spill over into next year also. The latest jobless claims figure was helpful to their cause, showing continuing tightness in the labour market and some wage inflation which will also need to be tackled.

Amid the noise, the third-quarter reporting season has generally been better than expected so far, given the pricing power and general resilience which the majority of companies have shown. AT&T Inc (NYSE:T) and American Airlines Group Inc (NASDAQ:AAL) were the latest to report better than expected figures, although in general concerns remain that earnings forecasts over the next few months, and therefore valuations, will need to be reset as the rising interest rate environment begins to bite.

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The net result from another volatile week has done little to change the dial on the weak performances of the major indices. In the year to date, the Dow Jones has fallen by 16.5%, the S&P 500 by 23% and the Nasdaq by 32% with volatility likely to persist for the remainder of the year as the economic impact unfolds.

Quite apart from the actions of the Fed having domestic impact, the commensurate rise of the dollar has affected many other economies and asset classes. Asian shares dipped once more overnight on the latest interest rate projections which could yet herald a recession, while the Japanese yen wilted in the face of dollar strength to sink to 32-year lows. At the same time, the Japanese inflation rate spiked to 3%, underlining the Bank of Japan’s dilemma as it tries to remain accommodative to boost the economy, but by the same token accelerating a weaker yen. In China, meanwhile, investors were on cautious alert ahead of any policy announcements from the Communist Party Congress, with shares edging slightly higher on hopes of economic aid.

The UK has captured the attention of the global investment community of late, although not for the right reasons. The political turmoil, allied to a volte-face around the fiscal event, have served to mar credibility, undermine sterling and send the gilt market into something of a tailspin which would have been more severe without Bank of England intervention. With the latest figures indicating a drop in retail sales and a further increase in government borrowing, the intense pressure will remain on not just the economy itself, but also for the country as an investment destination which had been showing some signs of life and overseas interest earlier in the year.

The domestically focused FTSE 250 continues to bear the brunt of investor ire and now stands down by more than 26% in the year to date. The general souring of sentiment continues to weigh also on the premier FTSE 100 index, which has fallen by over 6% so far this year.

Rallies have been short-lived and unconvincing, especially over recent weeks, leaving bulls searching in vain for a positive set of catalysts which could lead to an inflection point. In the meantime, retailers have been dealt another blow in early exchanges as the deteriorating consumer environment becomes ever more obvious.