Investors worried about a surge in inflation have been offered some relief. Our head of markets explains.
Markets seem set fair as the reopening trade continues to reflect improving optimism on post-pandemic prospects.
Despite Friday's non-farm payrolls figure which was significantly shy of expectations, the Dow and S&P 500 index posted record closing highs.
In an example of bad news being good news, the lower figure calmed the inflation and interest rate fears which had been overshadowing the markets’ recent progress. Indeed, there may be evidence of a labour supply shortage in addition to blocks in the supply chain, both of which indicate that the strength of the recovery is encountering pressure points as it may be outpacing the availability of materials and workers.
As the first-quarter reporting season draws to a close, earnings and profits have largely outstripped expectations against increasingly easier comparatives, which should bode well also for the current quarter compared to the height of the pandemic a year ago.
In the year to date, the pace of progress has been rapid, with a gap appearing between the two main indices and the previously firing technology stocks, which have been under some pressure given the switch out of growth into value. The Dow Jones is ahead by 13.6%, the S&P 500 by 12.7% and the Nasdaq by 6.7%.
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Elsewhere, energy markets were unnerved by a cyber attack on a major US pipeline operator. As a result, the oil price added to the gains which were already being seen on higher anticipated demand, and now stands up by 33% so far this year.
Meanwhile, the UK continues its appeal as an investment destination. Quite apart from being perceived as undervalued, particularly in comparison with many other developed markets, it is also seeing the benefit of the global move towards economically cyclical stocks. The proliferation of sectors such as the banks, oils and miners within the premier index has propelled the FTSE 100 over the psychologically significant 7,000 level and up by 10.7% in the year to date.
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The latest GDP estimate on Wednesday will provide further clues on the UK economy’s direction of travel which, coupled with a further easing of lockdown due next week on the government roadmap, should provide further reasons for international institutional investors to run the slide rule over the UK’s prospects and perhaps invest accordingly.
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