Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

STOCK MARKETS hit an air pocket either side of the weekend as investors faced up to the reality of interest rates rising faster and further. Can corporate earnings keep investors on track?

The Wile E Coyote moment

On Friday the cartoon character looked down. The legs stopped spinning. And the market dropped. The S&P 500 fell 2.8% as investors heard, and finally registered, Fed chair Jerome Powell’s seriousness about tackling inflation. He said a half percentage point rise was on the table for next week’s rate-setting meeting. And with that the probability of 3% US interest rates by the end of the year shot up to 75%. Two 50 basis point hikes this month and next are now pretty much nailed on. The Fed has clearly shifted from a gradual return to normal to more of a shock and awe monetary policy.

China Crisis

So, the US led us into an anxious weekend. And China led us out. The CSI 300 index tumbled by 4.9% on Monday after speculation mounted that the capital, Beijing, was about to follow China’s commercial and financial hub, Shanghai, into a damaging and possibly extended lockdown. China’s bid to keep a lid on Covid is stretching the willingness of its citizens to put up with real hardship as apartment buildings are fenced off and food supplies run short. Hong Kong and Japan followed suit, down 3.8% and 1.9% respectively.

Macron scrapes home

So, the market set up could hardly have been worse for a Europe waking up to a predictably close-run French election result in which incumbent President Emmanuel Macron just managed to fend off his far-right rival, Marine Le Pen. Many left-leaning voters opted for what they saw as the lesser of two evils. Others simply abstained in the lowest turn out since 1969. France joins a long list of countries that is effectively split down the middle in a culture war between the haves and have nots. European markets followed France’s CAC 40 lower in sympathy.

All eyes on the earnings flood

Something like 300 of the S&P 500’s constituent companies are due to announce their first quarter results over the next two weeks. With investor sentiment, and so stock market valuations, in retreat, the pressure is on corporate earnings to keep the market’s head above water. So far, with 100 or so big US companies having reported, 80% are beating expectations. Earnings are still expected to grow by 11% this year. So far, so good. But the pressure is on.

Risk off

The flight to safety is clearly evident in currencies, with the dollar boosted by risk aversion and rising US interest rates. Most other currencies are feeling the pain of being on the other side of that trade. The pound is down to $1.27, the euro stands at $1.07. Japan’s yen is at a 20 year low at 128 yen to the dollar. Meanwhile, despite supply fears, oil is down at $102 a barrel.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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