- FTSE 100 opens up in positive territory, but investors set to stay cautious.
- Oil prices rise amid concerns of an attack by Iran on Israel.
- Labour ministers go on a charm offensive to help calm market jitters after borrowing costs rise
- 10-year gilt yields creep upwards again after retreating slightly and are hovering around 4.49%.
- Non-farm payrolls in focus for fresh clues about economic picture ahead of the US elections.
- Resilient shoppers help push Amazon’s revenues higher.
- US inflation is within a whisker of target, while Eurozone inflation creeps up.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
’’The FTSE 100 has stabilised after three days of losses, starting the last session of the week in the green. It’s been buoyed by energy stocks boosted by the higher oil price and a significant win for consumer goods giant Reckitt Benckiser in a case over its baby formula. However, an element of wariness is set to remain. Worries continue to swirl about the UK Budget stoking inflation and adding to the debt burden, geo-political tensions in the Middle East have risen sharply and a highly fractious US Presidential election is coming up next week.
Reckitt Benckiser has shot to the top of the FTSE 100 leaderboard, with shares up sharply in early trade after it was cleared of liability in case over its pre-term infant formula, made by its US subsidiary Mead Johnson, by a state court in Missouri. The trial investigated if Reckitt and another manufacturer Abbott knew about disease risks linked with this type of formula. Investors are clearly relieved the manufacturers have been cleared by this court, but other trials are pending, and the companies were found liable in other cases. The companies’ overall liability was estimated at up to $2.5 billion. However, there is clearly a hope that costs for Reckitt may be more limited given this outcome of this case. The baby milk business has been classified as ‘non-core’ as part of Reckitt’s new strategy, but given the controversy surrounding Mead Johnson’s product, selling off these operations won’t be without considerable complication.
Reports that Iran is preparing to launch an attack on Israel from Iraqi territory using drones and missiles have pushed up oil prices sharply. A barrel of the benchmark, Brent Crude, has risen almost 3% heading towards $75 a barrel, as concerns about the effect on supply from the Middle East. Traders are bracing for another escalation of conflict given that Israel has already vowed to hit Iran hard if its military launches fresh attacks. Reports that the cartel, OPEC+ might put off a planned increase in output when it meets in early December have also given support to prices, amid expectations there might be a bit less crude washing around the market.
Government ministers are continuing a charm offensive to help calm market jitters after the quiet confidence investors appeared to show, began seeping away. Government borrowing costs have ramped up since the Budget, with gilt yields spiking to their highest level in a year, before retreating, and they are edging higher again. Expectations that inflation may creep back upwards again is partly behind the moves. An interest rate cut next week is still highly likely, but markets now don’t expect rates to dip below 4% next year.
Investors in UK debt are also baulking at the extent of extra borrowing the government is taking on, even though it’s being flagged as being spent on investment for growth. However, although a short-term surge in activity is expected, growth is forecast to come in lower towards the end of the parliamentary term. But the investment plan was not billed as being a short-term solution to boost output. Waiting for the billions being spent on infrastructure and improving education, skills and health to boost economic activity will be a long game. The execution of all these projects will be watched very closely, given that the risk premium appears to have reappeared for UK debt, despite the International Monetary Fund’s endorsement of the government’s plan.
A key US jobs number, non-farm payrolls, will be closely watched later, as an indication about the strength of the American economy. It’s looking likely that the pace of hirings slowed, but the unemployment rate is expected to hold pretty steady at 4.1%.The latest GDP figures show that consumers remain resilient, helping the economy expand at a rate of 2.8% in the third quarter, a little lower than forecasts but still a robust performance. Amazon’s latest results are another piece of the picture, demonstrating that shoppers remain confident, filling up virtual baskets with more goods, albeit cheaper items, helping increase margins. It’s forecast a stronger than expected demand for the upcoming holiday season. Amazon is firing on all cylinders with its advertising business pulling in more revenue than forecast, and demand for AI services is helping swell revenues at its cloud business.
Inflation is also heading in the right direction in the US, with the Fed’s preferred measure of prices dipping to 2.1% last month, just a whisker away from the Fed’s target. The fall in the personal consumption expenditures price index has pushed up expectations on financial markets for a rate cut from the Fed, with a chance of one coming next week put at 94%. On the face of it this progress with what’s been a punishing price spiral should help Kamala Harris’ chances next week. However, given that Americans have been hit with years of price rises, the latest economic data is unlikely to make many feel much better off, so it’s not set to move the dial in terms of votes. Fierce campaigning will be unleashed in battle ground states, as the days tick down to election day. Rhetoric about the damage each side with wreak on the economy will rise to fever pitch.
The wandering path of inflation is also keeping investors on their toes. Bets on rate cuts by the European Central Bank have been scaled back a little after Eurozone inflation accelerated more than expected in October. The chances of a cut in December as still judged to be high, but with inflation now rising to hit target there may well be a bit more caution from policymakers ahead.’
