Market snapshot: unanswered questions mean another volatile week

There are major influences at play this week, with the conflict in Ukraine, plus interest rate decisions in both the US and UK in the diary. Our head of markets talks us through the implications. 

With more questions than answers currently available, any short-term market rallies are currently lacking conviction.

Once more, there was optimism that some progress may be on the cards in the ongoing talks between Russia and Ukraine, although this has not yet been confirmed. In the meantime, the reported warning by the US to China over Russian aid is a reminder of the simmering tensions that had already existed between the world’s two largest economies.

In an important week for central banks, interest rate rises are likely to be the order of the day. Indeed, it appears that the elevated levels of inflation give the likes of the Federal Reserve and the Monetary Policy Committee no choice but to hike rates. The difficulty of those decisions is compounded by the current fears of stagflation, with any policy errors potentially leading to an unwanted recession.

In the US, the overwhelming expectation is for a rise of 0.25% in interest rates later in the week, with a similar rise expected in the UK taking the rate to 0.75%. On balance, the MPC seems slightly more hawkish than a Federal Reserve, which has taken much care in rebuilding a pandemic-stricken economy through loose monetary policy, and where inflation may be a secondary concern to ensuring that the economic recovery continues. Indeed, the expectation is that UK interest rates will hit 2% by the end of the year.

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Alongside an almost inevitable drop in US consumer sentiment, the main indices ran out of steam again and, in the year to date, the Dow Jones is now down by 9.3%, the S&P500 by 11.8% and the Nasdaq by 18%. The Fed’s outlook comments on rates, inflation and unemployment will also be scrutinised as investors try to understand the current thinking on direction.

The FTSE100, meanwhile, continues to plough a lone furrow in mitigating market losses. The index is currently down by 3.1% in the year to date, which is in stark contrast to the performance of many of its global peers – and perhaps most noticeably in the US – as some of its defensive attractions have almost brought the UK back into vogue as an investment destination.

In terms of its exposure to the likes of the oil and mining sectors, the 3% drop in black gold has taken some shine from early gains, even though the oil price remains ahead by 40% in the year to date. More broadly, the housebuilders and airline-related stocks received an early boost from an attempted return to a risk-on approach, with the banks also slightly up ahead of the expected MPC hike later in the week.

A slew of economic readings globally accompany the interest rate decisions this week, ranging from inflation to retail sales, while the corporate calendar is light in the slow approach to the end of the first quarter. In terms of sentiment, however, the biggest boon would unquestionably come from a breakthrough in talks between Russia and Ukraine.

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