One of the best performing stock indices of the past year, the FTSE 100 has started 2023 as it ended 2022. Our head of markets explains what's going on here and overseas.
Global markets were mixed, with the ongoing fight against inflation at the risk of central bank overtightening, taking centre stage.
Recent comments from certain Federal Reserve members seem to accept that progress is being made in taming inflation, while at the same time reiterating that a terminal rate of around 5% and higher rates for longer seem the most likely outcome. While there have been some weakening economic data of late, the labour market in particular is showing few signs of slowing. The latest job claims number signalled a further unexpected drop, displaying ongoing resilience despite the pressures being brought to bear by the Fed’s hiking policy.
A generally tepid start to the quarterly reporting season has added to investor concerns, with earnings being subject to some downgrades, particularly in the months to come. The major concern is that earnings valuations have not yet been adjusted to reflect the impact of a possible recession, which would be highly negative for equities on any number of fronts.
The recessionary rumbles which have loudened over recent days have also resulted in a blow to what was a promising start to the year. For January, the Dow Jones has now slipped into negative territory and has fallen by 0.3%, although the other major indices are for the moment holding their nerve, with the S&P500 and Nasdaq ahead by 1.6% and 3.7% respectively in the year to date.
Asian markets were similarly undecided, with a mixed to positive display overnight. The overarching concerns of a global slowdown remain, even though local investors are still pinning their hopes on a significant boost from the reopening in China. This possible division of prospects between Asian and other economies is propping up Chinese markets in particular, albeit amid a rocky start to the year.
For Japan, investors remain of the opinion that the central bank will need to readjust its easy monetary policy, as inflation spiked to levels not seen in four decades. It remains to be seen whether the increasing market noise will affect the central bank’s current intransigence.
Meanwhile, UK markets continued to fly the flag, dodging the recessionary bullet fears for the time being.
The FTSE100 index was buoyed by a return to risk-on behaviour, with the miners and oils especially in demand. Stocks which could benefit from the China reopening, such as Standard Chartered (LSE:STAN), Prudential (LSE:PRU) and Burberry Group (LSE:BRBY) all found favour in early exchanges, with the premier index now ahead by 4.4% in the year to date.
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The more domestically focused FTSE250 index has also seen a strong start to 2023, and is currently up by 4% in the year to date, after a tortuous 2022. Some of the more recent data has suggested relative resilience in the UK economy, with numbers still coming in lower but better than expected.
Today’s cautiously positive opening came on the heels of a retail sales release which showed a surprise fall in December, possibly because spending was brought forward to November as previously estimated, but in any event underlining the challenges which the consumer is currently facing.
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