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Home Banking Market report: Geopolitical concerns shrugged off, while pound dips and oil stabilises

Market report: Geopolitical concerns shrugged off, while pound dips and oil stabilises

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Susannah Streeter
  • FTSE 100 rises at the open with investors shrugging off geo-political concerns.
  • Oil prices stabilise above $77 a barrel for Brent crude, as hopes of Israel -Hamas deal are kept alive.
  • Fed chair Jerome Powell is in no rush to cut rates quickly.
  • Pound and euro fall back against the dollar as traders re-assess interest rate expectations.
  • Germany’s exports drop more sharply than expected.
  • UK EV sales need extra charge in the UK, after private buyers show reticence.
  • Meta may come of age with a slight hangover after the rip-roaring dividend party.

Susannah Streeter, head of money and markets, Hargreaves Lansdown

‘’The FTSE 100 has climbed at the start of the week with consumer discretionary and real estate companies boosted by hopes of interest rate cuts on the horizon this year. Investors have shrugged off the geopolitical worries about fresh attacks on targets in the Middle East by the US-led coalition, with hopes still high that a truce is in sight.

The weaker pound will have also given the internationally-focused index a lift.  However, exuberant sentiment on Wall Street is set to come off the boil slightly as investors get another reality check on interest rate cuts.

Oil prices edged back up, stabilising above $77 a barrel, after the US-led collation hit more Houthi rebel targets this weekend, following direct attacks on Iran-backed forces in Iraq, Syria and Lebanon. However, hopes of a Israel-Hamas truce are being kept alive, with US Secretary of State Anthony Blinken heading back to the region. Despite the intense show of force, Houthi attacks on ships have been continuing, with little end in sight to the disruption caused by the re-routing of cargos. The situation is yet another big set-back for Egypt’s economy, which has seen Suez Canal revenues fall by almost half in January. The number of ships navigating the waterway have plummeted by 36% since the start of the violence. It’s a bitter blow for Egypt, given that it comes amid a drop in tourism, as some concerned travellers have been avoiding the area due to the Gaza conflict.

There’s another dose of realism about the trajectory of interest rates at the start of the week. Fed Chair Jerome Powell took the opportunity on US TV on Sunday to stress that the central bank would be in no hurry to cut interest rates. Although reductions will come, they are likely to be at half the pace the market is predicting this year, with just three plotted by policymakers. This is a message he has kept drumming home, and clearly feels confident to reinforce it given the buoyant jobs report on Friday. Still, the softer landing the US appears to be heading for is a better situation than had been feared and is likely to keep some optimism bubbling about the wider economy.

As investors re-assess the likelihood of interest rates in the US staying higher until later in the Spring, the dollar has gained strength, and the pound has fallen. Sterling has dipped back to $1.26, its weakest level since the start of the year. While the Bank of England is also in wait-and-see mode, the stance has changed, with policymakers opening the door to potential interest rate cuts. The Euro has also dropped sharply against the dollar and is trading around its lowest level since mid-December. Germany’s weakness has been underlined by a dire exports snapshot. They fell 4.6% in December compared to November, worse than the 2% forecast, and the lowest since March 2022. As interest rates have been ramped up across Europe in response to rampant inflation, demand for goods from Germany’s key industries has faltered significantly, with exports to the EU falling 5.5%. China’s fragility amid its property woes and a drop in confidence has also been hindering Germany’s manufacturers, with German exports to the region dropping 7.9%.

The reticence of EV buyers in Britain won’t help German motor-manufacturers. Overall exports to the UK fell 4.3% in December, and reticence over buying bigger ticket items like cars, parts and accessories is likely to be part of the picture. Fleet buyers have been supporting overall motor manufacturing sales of EVs, but private buyers have been more reluctant to join the EV revolution. The government’s decision to delay the ban on sales of fossil fuel powered vehicles certainly won’t have helped, with mixed messages adding to buyer confusion. On the one hand, the incentives for companies to invest in EV fleets are generous, but deals for individual motorists have been whipped away. It’s clear more drivers are in need of an added push and the clamour for tax relief is likely to mount as we head towards the budget.

Facebook owner Meta may start its third decade with a slight hangover after the rip-roaring party that greeted its soaring profits and first dividend pay-out. Meta is coming of age and metamorphosing away from a high-growth firm to a more reliable relative who regularly comes armed with presents. It will still have to navigate stricter regulation ahead but as more funds search out the stock for its income generation, it should help the company navigate tricky legislative tides.’’

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