Market snapshot: investors tap on the brakes

US markets tapped on the branks after a blistering post-election rally which propelled each of the main indices to record highs.

The return of the bond market after a holiday on Monday was another factor in top-slicing share prices, as Treasury yields continued a rise which has been in place since September. The strength of yields can keep the cost of borrowing at elevated levels and is currently being driven by any number of factors, including the inflationary impact of the new President’s growth agenda, the likely additions to an already swollen national debt, and questions over whether the Federal Reserve will decelerate or even pause its rate-cutting cycle given the strong economic backdrop.

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The market breather was broadly based, including small-caps which have been seen as particular beneficiaries of a new phase of growth. The Russell 2000 dipped by almost 2%, although remaining up by more than 6% over the last month. The marginal falls across the major indices did little to halt what has been an increasingly fruitful year for investors, with the Dow Jones now ahead by 16.5% so far this year, and the more technology focused S&P500 and Nasdaq having added 25.5% and 28.4% respectively.

The focus of attention will now switch to the intriguing element of inflation, with the release of the Consumer Price Index later today. Expectations of an increase from 2.4% to 2.6% in October will do little to move the dial in terms of Federal Reserve thinking, but any figures which provide an outlier could add instability to share prices.

Indeed, core inflation, which strips out the more volatile elements such as food and energy prices, is expected to remain at 3.3%, although the risks are tilted towards the upside particularly given the future possibility of changes to immigration, and price rises following on from any reduction in taxes and increase in overseas tariffs. 

The possibility of such tariff increases has been a weight on Asian markets over recent days, with strong rhetoric from the new President unsettling trade aspirations, especially in China. Quite apart from disappointment emanating from stimulus measures which are seen as insufficient in their current form to revive the economy, the additional burden of US tariffs would come at a difficult time, with investors continuing to reduce or avoid China as the dust continues to settle.

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Meanwhile, in Japan, the Nikkei slipped by around 1% as wholesale inflation rose by 3.4% compared to the previous year, with some of the rise being attributed to the more recent weakening of the yen against the US dollar, which is a headwind for importers. Despite the sharp and temporary decline in August on the back of a potential global recessionary shock which did not materialise, the index remains ahead by more than 16% this year.

For the moment, the UK market is having something of a crisis of confidence, given various uncertainties over recent weeks including, but not limited to, the potential fallout from both the Budget and the US election.

After another weak session yesterday, the FTSE100 moved unconvincingly into positive territory at the open. There was some limited buying of more risk-on and China-facing stocks such as the miners, Prudential (LSE:PRU) and HSBC Holdings (LSE:HSBA), although such gains were muted. The premier index is now up by 3.9% in the year to date, apparently unable to build on any positive momentum and now almost 5% shy of the record levels seen in May.

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The standout performance in early exchanges came from the specialist engineer Smiths Group (LSE:SMIN), whose shares rose by around 12% after raising its full-year guidance both for revenue and operating profit margin. A potential increase to the share buyback programme added to the positive mood, which comes after a torrid time for the group based on a previously cautious outlook.

Indeed, the shares are down by 3% in the year so far and some 6% off the recent peak in September despite today’s bounce.