Market snapshot: investors continue switch to defensive stocks

Once again, it's the fear of aggressive interest rate hikes in the US that's making traders nervous. Our head of markets explains the thinking behind latest stock moves.

A likely escalation of sanctions and the possibility of a more aggressive Federal Reserve combined to pull the rug from markets.

With bond investors currently weighing the risks of a Federal Reserve induced recession caused by overtightening, comments from a Fed member added fuel to the fire. Governor Brainard said that she expects a rapid balance sheet rundown in conjunction with a number of interest rate rises this year, implying the possibility of a more aggressive approach than the one currently anticipated.

Minutes from the latest Fed meeting today could add further colour to the central bank’s thinking, with the likelihood of a 0.5% rise in interest rates followed by several more hikes of equal size gaining more traction in terms of market consensus.

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In the meantime, the sombre mood in the markets was reflected once more in a move towards defensive stocks, while growth shares promising large future earnings such as big tech bore the brunt of selling pressure.

This latest lurch downwards undoes some of the recent progress made and leaves the Dow Jones down by 4.7% in the year to date, while the S&P500 and Nasdaq have now shed 5% and 9.2% respectively.

Prospects seem little better elsewhere, with activity in the Chinese services sector shrinking at the fastest rate for two years. A surge of Covid cases has resulted in various lockdowns across the country, crimping general demand and restricting movement. This adds to the concern that the world’s second-largest economy is currently flatlining amid the raft of issues which global economies are contending with, such as inflation.

Further pressure on any general economic recovery is likely to follow later, with the expectation being that the US and its allies will ratchet up the ever-growing list of sanctions on Russia, in an attempt to ensure the country’s prolonged economic isolation. The current newsflow from the region seems to have moved away from the prospects of conciliation towards growing evidence of death and destruction in Ukraine.

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From an investment perspective, the UK is still maintaining a stiff upper lip, with the FTSE100 continuing to outperform many of its global peers. Despite nervousness in early trade, the index remains ahead by 3% in the year to date, with a number of its characteristics drawing international attention.

A healthy average dividend yield, undemanding valuations and any number of stocks offering a hedge against inflation are among the factors which have propelled the index to positive territory in 2022.

While the index is certainly not immune from the wider economic and geopolitical pressures, it nonetheless offers a form of defence which is in short supply elsewhere.