Susannah Streeter, Chief Investment Strategist, Wealth Club: “Sentiment is subdued after interest rate worries caused a wobble on Wall Street, with shares in big tech dropping sharply. The Footsie is on the back foot in early trade as investors await the Bank of England interest rate decision, with no change expected but no relief for consumers and businesses dealing with higher borrowing costs.
Stable inflation numbers have seen the rumour mill grind to a halt, with a pause looking like it's in the bag. For now, there appear to be enough deflationary forces pulsing through the economy to stop higher prices, caused by the energy shock, from bedding in more widely. The weakening labour market and sluggish economy are keeping a lid on investment and making consumers more cautious. Nevertheless, markets are still pricing in another rate hike this year, but forecasts could be revised depending on the tone of the Bank's statement.
Progress towards a peace deal in the Middle East isn't helping inject much more optimism into trading. Oil prices have eased further, with Brent crude dropping to trade around $77 a barrel. The digital signing of the interim agreement between the US and Iran, ahead of an official ceremony on Friday, is exerting a fresh downward force on prices, as new supplies are expected to hit the market just as demand has been weakened by rationing and energy-efficiency measures.
A British glass-half-empty attitude - expecting the worst but hoping for the best - appears to be influencing sentiment. But it's also mainly to do with the make-up of the FTSE 100. A fall in oil prices impacts big energy companies, which constitute around 10% of the index. The FTSE 100 is light on tech and misses out on much of the enthusiasm surrounding AI advancements.
In the United States, it's a different story, with big tech names dominating indices and optimism riding high. It's why a perceived change in the monetary policy stance can cause more volatility. Even though the Fed, as expected, voted to keep rates on hold, half the policymakers around the table signalled that they expect an interest rate hike this year. Kevin Warsh, the new governor, abstained from putting his forecast on the dot plot, but with others leaning towards a rate hike, it has unnerved investors.
SpaceX stumbled for the first time since its stellar IPO performance amid a rush of profit-taking. It's not surprising, given how high prices have climbed, that volatility is proving so prevalent.
However, US stocks are set for a rebound amid this somewhat erratic sentiment. Wall Street is expected to take cues from Asia, where indices stepped higher amid ongoing enthusiasm for semiconductor names. The unveiling of a new product from chip manufacturer SK Hynix has lifted sentiment, especially with demand for memory chips so strong that prices are soaring. Samsung Electronics also rose sharply, helping propel the Kospi higher.
A push-pull in attitudes is bedding in, with investors hoping, on one hand, for big future returns and, on the other, becoming nervous about whether valuations can be justified, especially in a higher-interest-rate environment.”
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