Investor Caution Amid Volatility Increase

After achieving new stock market highs, investors turned cautious as the spectre of a world trade war under President Trump along with all the uncertainties of Ukraine began to permeate through to the real economy. Is Trump scoring an ‘own goal?’ US consumer confidence has fallen 15% in the last month whilst the important Services element of the economy showed signs of actual contraction. Throw in disappointing read of Leading Economic Indicators amid higher inflation and you have all the elements of a volatility increase and a potential market correction.

Market attention was absorbed on the weekend German election. The result produced no major surprises as the centre right parties won by a comfortable margin over the far-right Alternative for Deutschland (AfD) which polled close to 21%. Friedrich Merz, the potential Chancellor, has to negotiate a viable grand coalition, (without the AfD?) which is likely to drag onto Easter!

Closer to home, the UK headline inflation index accelerated more than expected in January. A level of 3% (2.5% in December 2024) was a body blow to the government and the Bank of England. Services inflation was even higher at 5% so there is little good news for stretched consumers and mortgage holders, forlornly hoping for a March cut in UK interest rates.

One brighter spot was China. Local financial markets there have been in the doldrums for years, so it is a relief that the ‘artificial intelligence’ (AI) element of the market is bringing renewed interest to equities. Although the local technology sector is up 30% since the year end, the most obvious driver to this sentiment boost is Alibaba whose share price has climbed by a half over the same period.

There are now encouraging signs that the Communist party are at last prepared to unleash the strength of China’s burgeoning technology sector with less interference and key measures of support. Alibaba has announced plans to invest $52Bn on AI and Cloud computing over the next three years, highlights the change that is now starting to take place.

Discount retailer and bell weather stock, Walmart fell 10% despite resilient quarterly results. However, the cautious nature of its guidance for this year was enough for investors to take excellent profits over the last twelve months.

Vaccine producers such as GSK in the UK and Moderna in the US, saw revived investor interest. A Chinese team has found a new Bat coronavirus that carries the risk of animal-to-human transmission because it uses the same human receptor as Covid-19. The study was led by ‘Batwoman,’ Shi Zhengli, the virologist known for her work on coronaviruses at the Wuhan Institute!

Within the UK market, Standard Chartered Bank announced an 18% increase in annual profits, driven by strong performances in its wealth business and markets division. It also encouragingly said it was buying back $1.5Bn of shares to improve shareholder returns.

Competitor, HSBC which has had to manage major challenges from the Hong Kong property market also launched a similar but slightly heavier buyback programme of $2Bn. This all suggests that banks are awash with cash and have been quietly and firmly returning to form over the last twelve months or more.

Investors will be looking carefully on the latest US statistic on Friday of the Federal Reserves preferred measure of inflation. It has been stuck at 2.8% for the last three months – well above the 2% target level. Deriving more clues on the state of inflation will tell us if the Federal Reserve has scope to cut interest rates later this year.