Worries over Fed action trouble markets, and more housebuilders sign up to fire safety pledge

“6 April marks the start of the new tax year and in theory eager UK investors flush with cash will be rushing to deploy their new £20,000 ISA allowance. However, early trading on Wednesday didn’t suggest a flood of money going into the markets, with the FTSE 100 flat at 7,613 and markets generally weak in Europe and Asia,” says Russ Mould, Investment Director at AJ Bell.

“Investor confidence might have improved from the low point in early March when the Ukraine war was unfolding, and people were speculating that it might turn into World War 3. However, there remains significant headwinds for equities and the latest trouble spot is what the Federal Reserve might do to curb inflation.

“Comments on Tuesday from Federal Reserve Governor Lael Brainard imply the central bank is about to quickly reduce its balance sheet while at the same time aggressively push up interest rates. Her remarks caused a big sell-off in US stocks and that negativity has now spread to Europe and Asia.

“While investors have been expecting the Fed to do something about inflation for some time, it’s the likely pace of action that really worries the market. Tighten monetary policy too quickly and the economy could fall into recession.

“Fears about the strength of the economy in US naturally led investors to worry about the state of other geographies, casting a cloud over commodity producers. Glencore, Anglo American and BP were among the biggest detractors for the FTSE 100 in index points terms.

“Most of the corporate news on the UK market was centred on mid and small cap stocks, including yet another profit warning from defence group Avon Protection amid pressure on margins. Its credibility has been shot and the once highly-respected business will have to perform miracles to win back the market’s favour in the near-term.

“Women’s clothing seller Sosandar has endured a rocky time as a listed company but its latest update managed to put the company in the spotlight for positive reasons. Its shares jumped on a better than expected trading update, including a big jump in its net cash position and guidance for losses to be greatly narrowed.

“Unfortunately like all consumer-facing companies, Sosandar faces a big demand test in the coming months as households get their head around significantly larger household bills and work out whether they have any money left over for spending on nice-to-have but not essential items like new clothes.”

Housebuilders

“The housebuilding sector looks to be trying to get ahead of fire safety concerns as some of the major players, including Redrow, Taylor Wimpey, Persimmon, Berkeley and Crest Nicholson, sign up to a Government-backed ‘Developer Pledge’ to remove flammable coverings from buildings.

“While the pledge will cost these firms in the pocket, being proactive is a good thing for shareholders given the reputational and regulatory risks of not doing so. This arrangement also looks less onerous than the one which was floated in January.

“The clampdown on the industry came in the wake of issues raised by the Grenfell tragedy and with homeowners getting a raw end of the deal by having to cover the costs of removing cladding themselves.

“Accompanied by the leasehold scandal and previous controversies around pay and build quality housebuilders haven’t been doing much for their public image of late so an attempt to rehabilitate themselves is overdue.

“Pressure is likely to mount on those operators who have not yet signed up to the pledge.

“While the latest actions will address one of the concerns weighing on the sector, there is still the small matter of a cost-of-living crisis and more expensive mortgages to consider, as well as rising prices for raw material and wage inflation.

“The last decade or so has been a good time to be building houses – there was generous state support in the form of the Help to Buy scheme, very low interest rates and therefore cheap mortgages, and a strong housing market underpinned by supportive supply and demand dynamics.

“That might be about to change. The market remains resilient for now but pressures on Britons’ income is a worry and lenders are no longer offering such generous mortgage deals.

“At least companies have been fixing the roof while the sun was shining. Most have strong balance sheets which should enable them to weather any future storms and potentially sustain dividends to reward investors for their patience through any downturn.”

These articles are for information purposes only and are not a personal recommendation or advice.