- FTSE 100 rises with miners on the front foot amid hopes of easing of Covid curbs in China.
- House builders still languishing at multi-year lows amid worries about rate rises.
- Bank of England expected to raise rates to 6% to counter tax cutting splurge.
- Pound lifts slightly to $1.07 but the effect of the loss of confidence in direction of the UK still clear.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’Hopes that tough Covid restrictions could soon be in China’s rear view mirror have helped lift sentiment that one of the key roadblocks to a global recovery could be removed. Strict curbs have lifted in Hong Kong and there is growing expectation that Beijing will change direction on its zero-Covid strategy and open up the country by Spring next year to boost employment and incomes, which have been suffering due to rolling lockdowns. These glimpses of light at the end of what’s been a gloomy tunnel in China have helped lift commodity giants in early trade in London with Anglo America and Rio Tinto among the top risers on the FTSE 100, amid hopes of higher demand for metals.
Fears that an abrupt gear change for the housing market is just around the corner are still putting shares in house builders under pressure. Barratt Developments were 0.5% lower in early trade, bumping around lows not seen since the early days of the pandemic. Persimmon is clinging on to a positive open but shares are at levels not seen since 2014.
With banks and building societies pulling mortgage deals and reassessing their product lines amid expectations of steeply higher interest rates, anxiety is rising that repayments may become unaffordable for great swathes of homeowners. Forward order books for house builders have been pretty resilient but an increasing number of buyers are likely to baulk at taking on huge new loans if monthly payments shoot up by as much as feared. The financial markets are expecting that the Bank of England will be forced to raise the official bank rate to 6%, to counter the inflationary effect of the Treasury’s mammoth tax cuts.
The pound has stabilised at $1.07 after the Bank of England intervened to reassure the market that it would be bold in ramping up rates at the next meeting in November. There was initial disappointment that there would not be an immediate emergency hike to try and shore up the pound, but the direction of travel is still clear. There is only one way rates are going – and that’s up – and the effect is going to be painful for companies and consumers. The might of the dollar is pulling on the strings of sterling’s weakness with the US Federal Reserve indicating that inflation is still sharply in its sights, with more hard hikes to come.
The impact of Kwasi Kwarteng’s budget shock is still stark, as the pound is still 5% lower than it was on Thursday, despite having made up some ground from the record lows of yesterday. Trading is still set to be volatile with confidence in government’s economic management of the UK shredded. Rates rises alone won’t be enough to shore up sterling significantly, given that other central banks are doing the same. Only a U-turn in the slash and spend policies is likely to significantly restore optimism in the UK, but the Truss administration is digging in its heels.’’
