Attention shifted to the macro environment on Tuesday as markets began to prepare for key inflation data from the United States and China, as well as a speech by Fed chair Powell later on Tuesday.
A strong European session on Monday was met by concerns about interest rates in the US session overnight and sparked a wave of caution early on Tuesday. The FTSE 100 was down 0.2% at 7,710 at the time of writing.
“After a Devon Loch style collapse for US stocks late on Monday, the FTSE 100 and other European indices started Tuesday on the back foot,” said AJ Bell investment director Russ Mould.
“Sentiment soured on Wall Street as two members of the Federal Reserve indicated rates would need to move above 5% in 2023 to curb inflationary pressures and this helped erase earlier gains.”
Jerome Powell is due to speak Monday afternoon and will be closely watched for any confirmation of the comments by the Fed members.
Markets will also begin to position for US CPI data on Thursday which has the potential to cause sharp swings in markets. US inflation is expected to fall to 6.5% after dipping to 7.1% last month. A further drop in inflation will be a major positive for risk assets and a precursor for a slow down in rate hikes.
Goldman Sachs recession calls
After a torrent of pessimistic predictions for the global economy, Goldman Sachs rolled back on previously downbeat forecasts and now say they see the European economy expanding 0.6% in 2023.
Goldman’s forecasts were not market moving in themselves, but if more economists join Goldman in making more optimistic predictions, it may provide support for risk assets.
Indeed, there is a consensus building that the second half will be considerably better than the first half, and this could provide the impetus to buy into equities.