Market snapshot: more gloom but areas of potential value will emerge

Stocks are lower and there are serious concerns about the outlook for global interest rates. But the UK could be more attractive as an investment destination says our head of markets. Find out why.

Sour sentiment and the usual suspects conspired to reduce markets in the US to a negative end to the week, month and quarter.

Further comments from the Federal Reserve reiterated the aim of higher rates for longer, until it can be sustainably shown that inflation is under control. The personal consumption index reading release on Friday underlined that this milestone has not yet been reached, with prices excluding food and energy rising by 0.6% in August after a flat July. On a yearly basis the core number rose by 4.9%, ahead of the expected 4.7%. as such, the Fed is likely to keep a firm hand on the hiking tiller for the time being.

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The effect on growth has yet to fully wash through, with the concern remaining that progress could be choked, pushing the economy into recessionary territory. The imminent third-quarter reporting season, for which there is a sense of foreboding, is likely to show a different picture on the ground with, at the very least, inflationary pressure crimping margins. 

The next test on whether the economy is feeling the effects of Fed tightening will come at the end of the week with the release of the non-farm payroll figures. Current forecasts for 250,000 jobs to have been added would compare with 315,000 the previous month, with the unemployment rate expected to remain unchanged at 3.7%. Such numbers would also leave the door open for further Fed action with the economy showing some resilience and the labour market remaining tight.

In the meantime, the woes of the quarter have left each of the major US indices in bear market territory by any measure. In the year to date, the Dow Jones is down by 21%, the S&P500 by 25% and the Nasdaq by 32%.

The oil price rebounded after some recent pressure, although its gain of 12% in 2022 leaves it far from its peak earlier in the year. The latest spike came on news that OPEC+ was considering a cut in output of 1 million barrels per day, which would mark the biggest reduction since the beginning of the pandemic and would give some respite to the pressures of slowing global demand and an ever-strengthening US dollar.

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Asian markets were mixed to lower in thin trading, due to various holidays across the region. A reading on Friday pointed to further slippage in the Chinese economy, with factory and services activity dropping further as the effects of various lockdowns kept a lid on immediate recovery prospects. Rising raw material costs and a cloudy outlook hampered the region as a whole, with the likes of Japan, Malaysia and Taiwan showing reduced activity.

The downcast feel extended to the UK in early trade, with a reduction in the country’s credit rating to negative from stable following the previously announced mini-budget at the forefront of international concerns. The possible effects on the economy have been most painfully reflected in the performance of the more domestically-focussed FTSE250 this year, which has now declined by 27%.

The premier index has also seen its earlier 2022 gains evaporate, with the FTSE100 down by 7% in the year to date. Given the latest lurch downwards, an interesting picture could be emerging. The weakness of sterling should underpin FTSE100 earnings to a large extent, while also potentially shaking international suitors out of the tree for those who have been considering any form of acquisition activity.

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At the same time, the index as a whole is becoming increasingly attractive in terms of historic valuations, while the average dividend yield of 4.2% remains an additionally attractive consideration, especially when compared to most global peers. At a time when investors are finding increasing difficulty in seeing the wood for the trees, hidden areas of potential value may well be uncovered.