Market snapshot: big tests are yet to come

The general market reaction to the new President’s raft of executive orders has been muted, even bringing some relief in the absence of the expected immediate announcements on tariffs.

US markets will today have their first chance to react fully to the measures, not all of which will be market related, and while it is too early in the day to put much weight on equity futures, the current indication is that the main indices may open slightly higher.

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By way of a further clue, the reaction of the currency markets, where the dollar inevitably strengthened at the expense of currencies such as those of Canada and Mexico – where the President is considering 25% tariffs from 1 February – was relatively sanguine.

Of course, the real tests are yet to come when the potentially inflationary impacts of any tax cuts, lesser regulation and immigration policies are known, while the generally pro-business agenda could work in investors’ favour. As evidenced in the President’s first term, one outcome which seems inevitable is an increase in volatility, given the range and speed with which any measures could be introduced.

Asian shares were mixed to positive overnight, with sentiment underpinned by some more conciliatory noises emanating from the White House which could help to repair the fractious relationship between the US and China. In more domestic news, shares of beleaguered property developer Country Garden rose by almost 24% after the deadline to come to an agreement with its creditors was extended.

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In the absence of any definitive leads from other global markets, the release of UK unemployment figures took centre stage at the open. The jobless rate rose to 4.4% from a previous 4.3%, potentially beginning to show the effects of the measures announced in the Budget which could be washing through to a lessening of companies’ propensity to hire.

In turn, this should increase the likelihood of an interest rate cut from the Bank of England next month as the economy continues to teeter. While this is currently being priced in by the market, a potential fly in the ointment came in the form of average weekly earnings, which rose by 5.6% against an expected 5.5%, thus adding to inflationary concerns.

The banks were the early beneficiaries of an increasingly likely loosening of monetary policy, with some strength in the likes of Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY) in particular given its higher UK exposure. Initial gains were tempered by broker downgrades to the likes of Rightmove (LSE:RMV), Associated British Foods (LSE:ABF), Pearson (LSE:PSON) and Sainsbury (J) (LSE:SBRY).

More broadly, a number of factors would need to be in place for the current rally to continue, such as the tailwinds which have helped thus far this year. Given its large exposure to mining stocks, improving fortunes for global demand (especially from China) would be well received.

Similarly, should an oil price which has already risen by 6.9% in January continue its ascent, this would lead to firm upward pressure on the oil majors within the index, namely BP (LSE:BP.) and Shell (LSE:SHEL). Another large constituent sector is the banks, which report full-year earnings in February. A strong set of numbers could propel the shares higher (the read across from the US last week is a positive potential sign), and already the likes of Barclays has added almost 11% this year.

In addition, a continued weakness in sterling, especially against the US dollar would likely be of benefit, since it is estimated that over 70% of FTSE100 earnings come from overseas and the US in particular, which therefore makes profits more valuable when translated back into the UK currency.

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Set against these positives, there is also the possibility that the new President introduces measures which are less inflationary than expected, which in turn could prompt the Federal Reserve to resume its interest rate cutting cycle. Such a move would likely tempt investors back to chasing high growth opportunities in the US, especially the likes of mega cap technology shares as was seen last year, partly at the expense of the UK’s premier index.

In the meantime, a rise of 4.4% this year for the FTSE100 leaves the premier index 5.5% away from the next important psychological milestone, such that the suggestion of a FTSE100 at the 9,000 level does not currently appear to be so outlandish.