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Home Banking Market report: Stubborn UK inflation adds to interest rate worries, oil rises on Israel conflict, and chip wars rear up

Market report: Stubborn UK inflation adds to interest rate worries, oil rises on Israel conflict, and chip wars rear up

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Susannah Streeter

Market report: Stubborn UK inflation adds to interest rate worries, oil rises on Israel conflict, and chip wars rear up

  • Inflation is staying obstinately high in the UK, adding to worries that rates will have to stay higher for longer.
  • Brent Crude jumps to above $91 dollars a barrel after fresh violence in the Middle East.
  • Strong US retail sales lead to fresh worries about restrictive policy continuing at the Federal Reserve.
  • Fresh curbs on exports of advanced chips to China amid worries about real estate debt defaults offset better economic data.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘Inflation is staying obstinately high in the UK, adding fuel to fears that interest rates will have to stay in an elevated position – a pattern of worry that’s just reared up again in the United States. An unwelcome combination of worries about a worsening situation in the Middle East and concerns about high interest rates settling in, is unsettling investors.

Prices had been cooling in the UK but instead of heading a small notch downwards as largely expected, the CPI headline rate of inflation came to an abrupt halt in September, as the impact of higher fuel prices fed through. Oil prices have surged again amid worsening violence in Israel and Gaza, with Brent Crude the benchmark heading above $91, adding to worries that inflation will stay stubborn. The door has still been kept ajar to another rate hike in the UK, but at the very least still untamed inflation is pushing any chance of a rate cut further back into next year. Higher crude prices are set to buoy London listed energy giants in early trade, while risk-averse sentiment creeps back.

In the United States, shoppers are still flexing their cards and spending valiantly, with retail sales coming in stronger than expected. The resilience of consumers, despite the sharp ratcheting up in interest rates, has again led to expectations that the Fed will have to keep rates higher for longer, with the another rate hike still potentially on the cards. Yields on 10-year Treasuries shot up to above 4.8%, to the highest level since 2007, as the monetary screws look set to be kept firmly intact. Gains were wiped out on Wall Street, leading to a fresh sell off in Asia, dampening hopes of a higher start to trade for indices in Europe.

 Just as geo-political tensions escalate in the Middle East, and Ukraine uses long range weapons against Russia for the first time, trade relations between China and the US are turning testier again. The Biden administration is planning to prevent the sale of more advanced semi-conductor chips to China. This broad-brush move has pushed down Nvidia’s shares, with further falls expected later today. The fresh curbs have been designed to close loopholes which opened up after previous export bans. Although other firms will also have to comply, Nvidia is particularly sensitive to attempts to reduce Beijing’s ability to use AI, given that China accounts for around a quarter of its revenues for data centre chips. But this dip in valuation is a drop in the ocean for Nvidia, which has seen its shares swell on a tidal wave of speculation about its growing might in AI’s future. It’s also just signed a deal with FoxConn, the multinational contracts manufacturer, to develop AI factories using Nvidia’s chips and software. They would develop and manufacture the technology needed for the production and software for self-driving cars, among other uses. As one avenue closes for Nvidia, it has the agility to speed down another lucrative alley.

These fresh attempts by the US to curb China’s expansion into AI dented any optimism emanating from some better-than-expected economic data. Growth came in at 4.9% for the July to September quarter, compared to the same period last year, and retail sales figures were also more upbeat than expected. Another shadow is being cast over the slightly more positive reading for China by a fresh twist in the sorry tale of its property sector. It’s feared Country Garden, a sprawling real estate giant, has defaulted on its offshore debt, given that the grace period for an interest payment has expired. Although parts of China’s economy appear to be firing on more cylinders, it’s feared the malfunction in real estate still has the potential to cause more damage in other sectors.’

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