Interactive Investor

Market snapshot: why today will be hugely significant for share prices

26th January 2022 08:05

Richard Hunter from interactive investor

Tonight's announcement from the US central bank is hotly anticipated because it will help set the scene for global stock markets in 2022. Our head of markets explains. 

Market volatility persists after another whipsaw session despite little new news.

Stocks across the major US markets each finished lower, although recovering from deeper declines earlier in the trading day. The fragility of sentiment remained in clear evidence as any buying pressure from bargain hunters was outpaced by the general switch to haven investments such as the dollar and gold.

The Federal Reserve announcement later today is expected to reveal a more aggressively hawkish stance in the face of persistent inflation, and with the employment situation currently healthy, the Fed’s attention is likely to turn to tightening. Even after the likely interruption to the recovery in January by the Omicron variant and the weakness of markets so far, it appears that the central bank will have little option but to intervene.

A small glimmer of hope to beleaguered tech stocks came from Microsoft (NASDAQ:MSFT), where revenues and profits beat expectations. Particular solace was taken from the company’s upbeat outlook, which investors hope will be repeated across the tech bellwethers which have yet to report.

In the meantime, the performance of the main US indices remains dire, and in the year to date the Dow Jones has shed 5.6%, the S&P500 8.6% and the Nasdaq 13.5%.

The oil price reacted to the rising geopolitical tensions between Russia and Ukraine and the possibility of sanctions from other major powers. Added to supply concerns which could ensue, the squeeze has led to a hike of 13.6% in the year to date.

The increase in the oil price and the tightening of monetary conditions generally have both underlined the FTSE100’s increasing emergence as something of a defensive play for investors.

Both oil and bank sectors are adequately represented within the index and, allied to a raft of mature companies with varying degrees of pricing power, there is an element of inflation-proofing built in. At the same time, the valuation of the index remains undemanding compared to global peers, while the average dividend yield is also high compared to other key markets.

The UK has certainly not escaped the pressures currently being experienced on a global scale, but it has been rather less susceptible to the volatility which has dominated market sentiment so far, partly due perhaps to its limited exposure to the likes of big tech.

Following a decent open driven by a broad mark-up of oil and travel-related stocks, the UK’s premier index remains marginally ahead on Wednesday, having added 0.8% in the year to date.

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