When America has a problem, everyone has a problem. Our head of markets looks at the latest situation in the States and how it's continuing to affect UK stocks.
With the debt ceiling deadline rapidly approaching and in the absence of a resolution to the current impasse, global markets are beginning to buckle.
Whereas the previous view had been that a deal was imminent, sentiment has shifted to reflect the unthinkable possibility of a default which would send shockwaves through the global financial system. Treasury Secretary Yellen added to the discomfort with her view that a potential early June default had become “highly likely”, with the continuing lack of progress likely to loom large in investor positioning. Quite apart from the nervousness in equities, bonds are also repricing to suggest that markets should prepare for the worst unless a last-ditch reprieve can be found.
The news somewhat overshadowed the release of the latest Federal Reserve minutes, which noted that there was less certainty on its hitherto aggressive interest rate hiking policy. However, by their nature the minutes are already out of date and subsequent comments from members of the Fed have reiterated that any decisions will remain data driven, also leaving the door open for further rises. The current consensus remains that the Fed will pause hiking in June, but increasingly that the hiking cycle could be resumed in July if the economy maintains its current resilience.
The shift in sentiment led to a weak session on Wall Street, with each of the major indices falling and with the Dow Jones slipping back into negative territory for the year to date, now down by 1%. The benchmark S&P500 and Nasdaq also saw their gains for the year being slightly eroded, although both remain comfortably ahead by 7% and 19% respectively.
The bearish baton was passed on to Asian markets, which also stumbled on the lack of debt ceiling progress. At the same time, the pace of the Chinese economic recovery came under further review after having disappointed so far, with investors questioning when or indeed whether further stimulus from the authorities would be forthcoming. More recently, tensions which are never far from the surface have also become apparent once more between the US and China on technology and security grounds.
In the UK, markets took a body blow yesterday on deteriorating conditions, with domestic inflation data coming in higher than expectations and all but sealing the next interest rate hike from the Bank of England. The news put further pressure on the beleaguered housebuilding sector, with the likelihood of more monetary tightening threatening to nudge the UK towards a recession which it has narrowly avoided so far.
Given its higher domestic exposure, the FTSE250 had taken the brunt of the concerns. The index traded largely flat at the open and has now posted a marginal gain of just 0.3% for the year.
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The FTSE100 meanwhile has followed a poor trading session with further losses. Developments overnight including news that Germany had fallen into technical recession left the bulls with nowhere to go, with the heavy exposure of the index to the fortunes of the US in terms of overseas earnings also in plain sight.
There was a further broad selling assault across sectors, although the housebuilders avoided the latest wave for the time being. The index nonetheless remains in positive territory this year and is ahead by 2%, although the scale of potential and imminent challenges are certainly not being underestimated.
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