Markets clawed back earlier losses to finish ahead, as dovish Federal Reserve comments broadly outweighed the concerns emanating from the current Middle East conflict.
As had been the case earlier in the UK, oil, gas and defence companies spiked on news of the outbreak of hostilities, while airline and cruise companies dipped. For the latter, the rise in the oil price was an additional drag based on those sectors’ reliance on energy as a significant cost. More broadly, the haven assets of the US dollar and gold also attracted buying attention as investors hunkered down.
However, developing news suggested the possibility of diplomatic efforts which could help quell the conflict and in any event reduce the risk of further escalation in the region. After surging by more than 4%, the oil price settled as traders weighed up the possibility that the aggression could be contained rather than spilling over into neighbouring, oil-rich countries.
Even with the evolving situation in the Middle East, investors remained focused on the Fed’s current thinking on interest rates and the need to contain inflation. Comments from Fed officials provided a timely boost, suggesting that the recent gains in Treasury yields, which influence rates for borrowing levels, could be doing some of the heavy lifting for them. In turn, this would lessen the need for additional monetary tightening, which was the news investors had been waiting for. Markets adjusted the likelihood of a no-change decision at the November meeting up to almost 90% as a result, as did the December consensus which also rose to over 70%.
Investors remain on high alert this week given the plethora of news coming through. Later in the week, the release of consumer price inflation and producer price index readings will provide further colour, while the third quarter earnings season also kicks off in earnest. In terms of earnings, investor hopes have been rising steadily ahead of the reporting period given the underlying strength of the economy, despite the dampening effects of the current rate hiking policy. Indeed, some surveys suggest that earnings are set to rebound after previous quarters of year-on-year declines, which would provide further investor comfort.
Amid the barrage of news, the main indices have held firm in the US, with each of the main indices in positive territory in the year to date. The Dow Jones has added 1.4%, while the more technology-influenced S&P500 and Nasdaq have jumped by 13% and 29% respectively.
The general sense of temporary relief, with the conflict relatively contained at present and Fed comments providing additional succour, washed over to UK shores, with the main indices opening higher. The FTSE100 was off to a brisk start, underpinned by broad-based gains in some of the more beleaguered sectors of late, such as the housebuilders and some of the retailers. The gains suggested a return to risk-on sentiment in opening exchanges, and the firm open leaves the FTSE100 ahead by 1.5% so far this year.
Whether the optimism can be maintained is open to debate, however, with any number of hurdles in the immediate future each carrying the possibility of upset. The FTSE100 remains a way off its February highs when the index rose above 8000, and it will take a concerted and sustained effort to attract investors back into what is currently an undervalued and unloved investment destination.