Home Banking Market report: Relief that crutch of cheap money may stay for longer but worries about recession remain

Market report: Relief that crutch of cheap money may stay for longer but worries about recession remain

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Susannah Streeter

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

‘’The feel good factor from earlier in the week has fizzed away but there is still some element of relief washing through the financial markets that the crutch of cheap money isn’t going to be withdrawn quite so quickly. Jerome Powell, chair of the US Federal Reserve, soothed fears about ultra-aggressive monetary policy, indicating expectations of 0.75% rate hikes in the months to come were some way off the mark. That helped lift the Dow Jones at the end of the session and has steadied overall market sentiment, with the Hang Seng in Hong Kong up slightly, the Nikkei down marginally and the FTSE 100 set to open in positive territory. However, Mr Powell’s comments hinting that policymakers would be more measured is also an indication of concerns about weakness in the global economy. Transatlantic worries are still  hovering about looming recessions hitting corporate and consumer spending. Tech stocks continued their tumble on the NASDAQ with Snap’s dramatic fall, pulling down big names like Amazon, Alphabet and Meta. Concerns are ricocheting about plummeting advertising spend which is being seen as a bellwether of economic strength. It highlights the ongoing sensitivity in the market surrounding tech stocks and the super-high valuations they have enjoyed as investors piled in after the initial shock of the pandemic.

Sterling has come off Tuesday’s low against the dollar and is back above $1.25, and against the euro it’s nudged back above €1.17 but fears about the fragility of the UK economy look set to keep sterling under pressure after the much weaker than expected PMI data showing a marked slowdown in business activity. This has led to expectation that the Bank of England will be forced to ease off on the accelerator when it comes to higher interest rates  with the market now expecting fewer hikes. Expectation of a ratcheting up in rates had pushed gilt prices lower as investors fled from government debt amid worries they could be locked into low rates of interest as the dial moved up. But yields on gilts, which move inversely to prices,  have begun falling again, an indication that the market doesn’t expect the Bank of England to be so aggressive in its monetary policy in fear of tipping the UK into a deep recession. Yields on 10 year gilts have fallen to around 1.88% after climbing to 2% at the end of last week, while yields on two year government bond are around 1.44%, down from 1.58% on Monday.

The rise in the oil price is keeping the inflationary screws on, with supply concerns rising again amid expectations that an EU oil embargo on Russian crude is closer to agreement. Brent crude has risen above $114 dollars a barrel, increasing for the fifth session in a row. The creeping up of supply worries came after the head of the European Commission Ursula von der Leyen said she hoped to secure the crude ban within days. It comes as demand for oil is expected to rise in the coming weeks as the so-called driving season in the US kicks off with the Memorial Day long weekend, when millions of Americans are set to release pent-up demand for travelling and head on trips over the summer.’’

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