Market snapshot: are we finally turning a corner?

Optimism on Wall Street and in Asia overnight reflects hope that actions being taken to tackle economic problems are beginning to work, and that much is already priced in. Our head of markets explains.

After a torrid few months, there are some tentative signs of green shoots emerging as investors become more comfortable with the stance of the central banks in tackling inflation.

The recent Federal Reserve minutes confirmed that further hikes in June and July were on the table, but that it would remain flexible thereafter. This has provided something of a relief rally to investors on two fronts, the first of which being that the statement could signal a pause in rate hikes in the autumn. At the same time, there is also the possibility that the Fed’s hawkish stance has now been fully priced in to markets, which could signal the return of some opportunistic buying.

Sentiment was also helped by some pleasing numbers from retailer Macy's Inc (NYSE:M), who reported strong demand for their high end apparel and luxury items ahead of what could be the busiest wedding season in decades, as the pent-up demand from the pandemic washes through. At the same time, better-than-expected reports from the likes of Dollar Tree Inc (NASDAQ:DLTR) suggested that consumer demand also remained intact towards the lower end of the chain, despite the recent disappointments emanating from Walmart Inc (NYSE:WMT) and Target Corp (NYSE:TGT).

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Indeed, the main indices in the US are currently on track for their first weekly gains since March, although there is still much ground to recover from the damage already encountered. In the year to date, the benchmark S&P500 is down by 15%, having narrowly avoided bear market territory earlier in the week, while the Dow Jones has lost 10% and the Nasdaq 25%.

The next test of investors’ mettle comes later today with the release of the Fed’s preferred inflation measure, the PCE core deflator. While inflation undoubtedly remains elevated, a drop to 6.2% from 6.6% is expected which could signal that inflation is at last turning a corner to more manageable levels.

The wave of cautious optimism also filtered through to the Asian markets and were consolidated after revenue growth from Alibaba Group Holding Ltd ADR (NYSE:BABA) beat expectations, boosting tech shares. In addition, the reported cooling of tensions between China and the US, and the likelihood of more stimulus from the former to support the local economy underpinned the positive moves.

In early trade, the UK has apparently not received the memo on this improving sentiment, with a largely flat opening. The spectre of inflation remains a concern, with the announced measures from the government to provide support for struggling households coming to some extent at the expense of the oil majors. Wider concerns on whether this could jeopardise plans for further wholesale investment in the UK remains to be seen, even though the shorter term impact should be positive for the economy overall.

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Even so, the FTSE100 has continued its spell as one of the few global developed markets to be in positive territory for the year, underpinned by its exposure to basic resources and its array of stocks with defensive characteristics.

The index remains ahead by 2.5% in the year to date, with the more domestically focused FTSE250 having taken the brunt of the declining outlook for the UK economy and having lost around 14% so far in 2022.