Market report: Dose of realism on interest rates sees caution return
- Euphoria evaporates as investors reassess prospects for interest rate cuts.
- FTSE 100 turns 40 amid a confidence crisis among UK company directors.
- Concerns red sea attacks could cause fresh inflationary headaches.
- US rate cut path in focus as Fed December minutes set to be released later.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“Caution has returned, as investors have begun to re-assess the prospects for interest rates and just how resilient economies will be over the months to come. There is also fresh nervousness about the prospects for conflict in the Middle East to escalate after a drone strike killed Hamas deputy leader Saleh al-Arouni in Lebanon. Israel is bracing for retaliatory action from Hezbollah, another twist in an already highly complex and tragic situation in the Middle East.
Stocks lose ground as company confidence ebbs
The initial pulse of positivity on the first day of trading in Europe has largely disappeared, with stocks losing ground. A gloomier sentiment is taking hold, which doesn’t provide much cheer for the FTSE 100, which is marking its 40th birthday, amid what seems to be a bit of a confidence crisis.
Mounting recessionary worries for the UK have prompted a fresh reassessment of how soon interest rate cuts will come, after a very downbeat outlook from company bosses, hot on the heels of a disappointing PMI reading on the manufacturing sector. The Institute of Directors Economic Confidence index, measuring optimism for the UK for the next year, has dropped to the lowest level since August. The IOD is now calling for an early rate cut, given the pessimistic outlook. There are hopes such a move could help jump-start the flagging engine of growth. Bets are mounting that interest rates will come sooner this year, despite policymakers’ mantra that they will have to stay elevated for an extended period. This has sparked a flurry of activity on the mortgage market, with better offers extended to homeowners and new buyers. These deals, trimming monthly payments considerably, will offer relief to cash-strapped households with big loans but also to companies reliant on consumer demand, and housebuilders.
Middle East conflict poses inflation problem
Middle East tensions could be a big spanner in the works for any hope that the Bank of England might start tinkering early with interest rates. Attacks on vessels in the Red Sea prompted the shipping giants Maersk to again suspend all operations. Retailers are now warning that delays and an increase in shipping costs could force them to push up prices, causing a fresh inflationary headache for Bank of England policymakers to navigate. Oil prices are fluctuating, amid uncertainty over the security of supply in the Middle East and global demand, given that high interest rates are still set to weigh on key economies with a barrel of Brent trading around $76 dollars. However, if attacks by Houthi rebels become more intense and if the Israel/Gaza conflict widens, there is likely to be a fresh move upwards, increasing transport costs further.
Soft landing for US could harden
The IMF has applauded the Fed’s policies in helping tame inflation, indicating that it believes the US economy is heading for a soft landing. However, there is a dose of realism settling in that even if rate cuts do come sooner this year, they’ve climbed so high, that they will still be staying elevated throughout 2024, and have the potential to cause economic pain.
Apple has been the big market mover on Wall Street, with its sheer might mainly behind the shift lower in indices, after Barclays flagged that it believed demand for products would be lower. Even the most ardent fans might put off pricey purchases, when other living costs are proving painful, while China’s fragile economy is also making domestic consumers cautious.
Investors look for clues about path of rates ahead
Investors will be looking for fresh clues about the map ahead for rate cuts, in the Fed’s minutes of its December rate setting meeting, which is set to give a fresh sense of direction for stocks. Unemployment data for Germany will also provide a further snapshot of just how much the economy is weakening in the face of high borrowing costs. The Eurozone manufacturing sector is recovering but is still way short of entering into growth territory, according to the latest PMI snapshot.’’
