THEY say that markets climb a wall of worry and that certainly looks to be the case at the moment with key indexes around the world at or near record territory despite ongoing concerns about growth and inflation.
Japan’s stock market is not quite in new territory but resurgent interest from foreign investors has pushed the Nikkei to a 33-year high and it remains on track to exceed its previous high water mark, set as long ago as the late 1980s during Japan’s infamous property and stock bubble.
Japan is benefiting from a cocktail of positives today. It has re-opened after a long Covid shut down. It is increasingly being viewed as a safer Asian alternative to China in the wake of deteriorating US/China relations and unpredictable policy in Beijing. And its market is relatively cheap, certainly compared to Wall Street.
Closer to home Germany is emphatically in uncharted territory, with the DAX index up 17% year to date and overtaking its previous high in November 2021. Some high-profile shares are doing even better, with the likes of Adidas and Siemens up around a quarter year to date.
So, a key question is whether the important US market can follow suit after a year in which it has moved sideways, with valuations seemingly locked in a channel between roughly 15 and 18 times expected earnings. Bumping up against the top of that band, US shares seem to want to break upwards alongside their counterparts in Asia and Europe but to do so they will have to overcome a few key worries.
First up, and dominating the news this week, is the so-called debt ceiling which limits whether the US Treasury can issue new bonds to fund its spending. Without an increase in the cap, the US could in theory run out of money as soon as the beginning of June. This is widely seen as a very unlikely scenario, but markets are on edge because it would have far-reaching consequences given the importance of the US bond market to overall global financial stability.
For US shares to really take off, investors will also need evidence of stabilising corporate earnings expectations and signs that the Federal Reserve is finally done with rate hikes and is starting to think seriously about reducing the cost of borrowing again. The jury is out on both of these.
Here in the UK, the big story this week is Wednesday’s inflation announcement. After recent disappointments, with the inflation rate sticking in double digits while price rises started to fall in other key markets like the Eurozone and America, the expectation is that the headline figure will start to fall sharply this month. Perhaps as low as 8.4%.
The main driver of that decline will be last April’s hike in the domestic energy price cap falling out of the year-on-year comparison. Looking forward inflation is now forecast to fall back to the Bank of England’s 2% target by early 2025.
The potential fly in the ointment is wage growth, which remains persistently high as workers seek to protect themselves from rising prices. If the Bank of England is concerned about a wage-price spiral, it will be reluctant to risk reducing the cost of borrowing prematurely.