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Inflation concerns begin to weigh on equity markets

An update on the markets as inflation concerns and a continued rotation out of growth stocks is beginning to weigh on equity markets.

Article updated: 5 March 2021 10:00am Author: Richard Hunter

The Federal Reserve’s insistence that it believes these inflation moves are transitory was not enough to arrest a further spike in bond yields, as investors fretted that there were no plans to control the longer end of the yield curve. At the same time, the perceived threat of higher interest rates arriving earlier than expected washed through to the shares which could be most obviously affected by the resultant slowing of profits.

Alongside this disappointment, the rotation continued out of growth stocks into the likes of industrials which are seen as beneficiaries of the anticipated economic recovery later in the year. The main indices are marginally clinging on to their gains so far this year for the moment, with the Dow Jones up 1% and the S&P500 0.3%.

However, the technology-laden Nasdaq index has been in the firing line of these moves, with the Nasdaq dipping into negative territory for the year, currently standing down 1.3%. Indeed, since the closing record high in mid-February the index has dropped by 9.7%, leaving it on the cusp of a technical correction.

Meanwhile, further clues on the US economy are due when non-farm payrolls are announced later, with the expectation of 182000 jobs being added, as compared to 50000 last month, and with the unemployment rate unchanged at 6.4%. This is likely to bring some focus back towards the President’s proposed stimulus package as the economy fails to fire.

The UK is certainly not immune from these concerns and has also been under pressure for the last few days. One bright spot has come in the form of the oil price, which added to gains as OPEC and its allies agreed to keep production cuts in place for the time being. The oil price is now ahead by 31% in the year to date, which has in turn propelled the share prices of important FTSE100 constituents BP and Shell by 23% and 16% respectively.

For the moment, the increasingly successful vaccination rollout programme and its implications for a strong recovery has been eclipsed by the scale of the challenges ahead, as evidenced by the Chancellor’s Budget outlook. This leaves the UK market delicately poised as it confronts the challenges of inflation concerns, exposure to an uncertain US outlook within the FTSE100, sterling holding firm and generally dampening sentiment.

The premier index remains ahead by 2% in 2021, a way off its January highs and awaiting the next positive catalyst, which could yet come in the form of renewed international investor interest on valuation grounds.

More from Richard Hunter: read more articles directly on the interactive investor website.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Richard Hunter

Head of Markets, interactive investor

Richard has over 30 years of stockmarket experience and is one of the UK’s foremost commentators on market matters and a regular contributor for the BBC (BBC News Channel, Wake Up to Money and the Today Programme), CNBC and Bloomberg. Richard’s expert commentary also appears across the national and specialist press. He previously held senior positions at Hargreaves Lansdown and NatWest Stockbrokers.

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