Inflation concerns globally drove markets lower, while in the US specifically investors began to question the narrowness of stocks which have been responsible for the recent rally.
The UK has similar pressures on inflation, interest rates and government borrowing, quite apart from a political situation which is demanding an inordinate amount of investor attention. The uncertainty has most keenly felt in the gilt market with the associated higher yields, while the more domestically focused has seen its year to date gains eroded, now standing flat as some of the optimism from previous months has evaporated.
The premier index has also suffered given the financial attacks which have come from many angles and the is now more than 7% away from the record closing high set in late February. Nonetheless, it remains ahead by 2.5% so far this year, while still providing a relatively stable backdrop, with any number of established and cash generative companies adding to the attraction of an average 3.1% dividend yield across its constituents.
At the same time, there seems little to no reason for the to lower interest rates, and there is an increasing possibility that a hike could be on the cards at some point this year. In any event, higher for longer would hit growth stocks the hardest, which, accompanied by some profit taking after the recent spikes, saw technology stocks giving up some of their recent gains. The likes of Intel (NASDAQ:), Advanced Micro Devices (NASDAQ:) and Micron Technology (NASDAQ:) each fell by around 6%, while Nvidia (NASDAQ:) drifted more than 4% lower ahead of what could be a pivotal set of quarterly numbers on Wednesday.
The AI poster child is called to report revenues of $78.5 billion, which would be a spike of 80% from the previous year. With expectations at such a lofty level, and as seen in its previous quarterly numbers, anything other than a comfortable beat will likely be punished by hungry investors. Meanwhile, this week will also provide an important update on the health of consumer spending, with results from bellwethers such as Walmart and Home Depot.
With Treasury yields now around 5% and the oil price finding further strength given the latest round of harsh rhetoric from the White House on the lack of progress with Iran, the strength of the rally is coming under pressure. Quite apart from the fact that recent hikes have again been largely driven by a small number of stocks, the likelihood of a repeat of a blockbuster quarterly earnings season has fallen as the impacts of the conflict begin to take a firmer grip on the economy.
Higher borrowing costs have also brought the size of the US budget deficit back into focus, with the costs of repayments soaring let alone the additional spend which has been necessary due to the conflict with Iran. Progress on the latter has been limited, leading to the increasing realisation that even if the Strait of Hormuz were to fully reopen in the short term, the effects of the closure would linger for some time on the oil price, with estimates suggesting that one billion barrels will have been lost by the end of May.
For the moment, the market remains in decent shape, with the , and having added 3%, 8.2% and 12.8% respectively in the year to date, although Nvidia and the retailers will be the next acid test as the week plays out.