Despite the FTSE 100 opening in positive territory ahead of the long Easter weekend, boosted by another wave of optimism on Wall Street and confirmation that the UK had entered a technical recession at the end of last year failing to sour the mood, there are warnings about investment exuberance we should heed, notes Susannah Streeter, head of money and markets, Hargreaves Lansdown.
The FTSE 100 set off on solid ground on Thursday, lifting in early trade on the last day before the long Easter break, helped by another wave of enthusiasm on Wall Street.
Confirmation that the UK entered recession at the end of last year hasn’t soured the mood. The 0.3% contraction in the final three months followed a 0.1% dip in the third quarter, confirming two back-to-back quarters of negative growth.
But the ONS snapshot also shows that savings remained relatively high and real household disposable incomes increased in the last quarter of the year, adding to hopes that consumers resilience has been rising and that the recession will have been a super-short one.
US stocks have scaled fresh peaks, with the S&P 500 reaching new highs, with the recent rally more broad-based. Optimism continues to swirl about the prospects for lower interest rates on the horizon and better prospects for the world economy, even though warnings are piling up about the potential risks ahead.
Warnings from central banks
The Bank of England has cautioned that asset prices are stretched, and markets are at risk of a sharp correction, with repercussions for households, if growth forecasts are upset by high interest rates lingering for longer or a fresh deterioration in geopolitical relations.
Central bankers are also urging caution, with Fed Governor Christopher Waller stressing there should be no rush to cut interest rates and that a more restrictive policy could be in place for longer than previously thought.
Hawkish tones have also come from Bank of England policymakers Catherine Mann who warned that markets were pricing in too many rate cuts for the current year.
Investors have largely been shrugging off warnings from institutions and policymakers about the risks ahead, and irrational exuberance keeps pushing up valuations on Wall Street, with the Trump Media and Technology Group making further big strides helped by MAGA supporters buying power. However, Nvidia has slipped back, with a few questions creeping in about its super-high valuation.
The Bank of England’s warning about the risks ahead, should further geopolitical conflicts erupt, comes as hopes for a ceasefire in the Middle East slip further away, reigniting fears about an escalation of tensions. Israel has begun targeting sites in Rafah, and concerns are growing about a wider offensive.
Houthi rebels have been continuing to hit ships in the Red Sea, with no relief in sight for global firms having to re-route goods long distances. Russia is also rumoured to be gearing up for a large attack along the Ukrainian front line.
Oil prices have shifted higher as tensions remain high with eyes on potential supply issues, with Brent Crude rising towards $86 a barrel. On the demand side, a report from the US Energy Information Administration pointed to a smaller weekly increase in stocks compared to data from an earlier report from the American Petroleum Institute.
