Market Report: Muted start on markets as global growth worries reign and UK strikes erupt

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

Waves of Covid in China holding back business activity and a fresh incoming tide of industrial unrest in the UK are colliding to limit significant gains for the FTSE 100 in the first session of the New Year.

The challenging developments come amid warnings from the International Monetary Fund that 2023 is set for more turbulence. The turbines of the global economy are mis-firing, as the effects of the pandemic keep sparking in China, and efforts to cool hot inflation risk seizing up growth in the US and Europe.

In a clear reminder that the Covid nightmare is not yet over. The winter surge of infections held back factory output in China yet again in December, with a sharper contraction in activity recorded than in April, when cities were in the grip of mass lockdowns.

The Caixin PMI data, which surveys the views from purchasing managers mirrors official data, was released over the weekend and indicates the extent to which the spreading virus has disrupted supply chains and orders. Hopes that the rapid easing of restrictions would lead to an immediate snap back in demand have evaporated, with authorities bracing for the situation to get worse before it gets better as millions get set to travel across the vast country to celebrate the lunar New Year in the next few weeks.

Chinese health officials are set to give an update to the World Health Organisation on the Covid situation later today, but have been stressing that the latest variant is much milder. There was also a note of optimism in today’s PMI snapshot, with managers still hopeful for the year ahead, with confidence hitting levels not seen since February. Hopes that once the winter waves subside, China’s economy could get back on track,appear to be helping lift the oil price slightly, with a barrel of Brent crude rising above $86.This slightly more positive sentiment is reflected in moves on markets so far today.

Although Australia’s ASX 200 dropped lower, the Hang Seng and the Shanghai Composite both gained, performances which are set to help the FTSE 100 crawl into positive territory on the open. The DAX in Frankfurt is expected to fall back in early trade, with caution remaining ahead of German unemployment and inflation data expected later

In the UK, the insidious effect of rampant inflation is erupting into fresh labour disputes, with the transport network grinding to a go-slow with the latest mass walkouts of rail staff and highways employees. It’s a precursor of more disruption to come, with ambulance staff planning to cease work in protest again next week, as the fight between public sector staff and the government intensifies. Inflation is running at double digits but average pay growth for state employees stood at just 2.7% in the year to August to October 2022, compared to 6.7% for the private sector.

The stage is set for a fraught year for industrial relations as unions bed in for the long haul and the government seemsdetermined to resist demands, for now.  With employees urged to delay a return to offices and work virtually this week, the pain of the hospitality industry is set to be prolonged, as town and city centres are set stay emptier for longer, which will be particularly onerous for the crucial lunchtime and after-work trade.

In the US the post-holiday focus will turn back to finding clues about the direction of interest rate policy, and a muted start to the year is expected on Wall Street. Traders will be eyeing PMI data for the manufacturing sector and will pour through the minutes of the last Federal Reserve meeting, for any indication of when the Fed may final press pause on rate hikes.

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