UK markets pulled back sharply this week, with the FTSE 100 Index falling by 2.6% to trade at 7,735 points at the time of writing. Nervousness ahead of the US jobs report to be released later today and weakness in the US banking sector have raised doubts over the sustainability of this year’s market rally.
Equities also came under pressure earlier in the week after concerns that interest rates would stay higher for longer, which could trigger a global recession.
On a more positive note, the UK economy rebounded more than expected in January driven by growth in the services sector, according to official statistics published ahead of next week’s budget. Gross domestic product rose 0.3% between December and January, following a contraction the previous month, the Office for National Statistics said on Friday. This was higher than the 0.1% expansion forecast by economists polled by Reuters.
The higher-than-expected growth will reinforce expectations of a 0.25% rate increase at the Bank of England’s next Monetary Policy Committee meeting on Thursday 23 March. However, output was still 0.2% below its level in February 2020 and unchanged from January 2022, reflecting the negative impact of high inflation and rising interest rates on household finances. UK manufacturing production fell 0.4% in January and was down 5.2% compared with January last year, showing some underlying weakness as a result of high inflation and higher interest rates.
Commodity markets
In the commodity markets, Brent Crude futures traded around $81 per barrel on Friday and are on track to end the week around 5% lower, weighed down by fears that the US Federal Reserve will raise interest rates further to combat inflation. This increases the risk of a recession, which could reduce energy demand.
Oil exports from Russia also continued to hold up well, even in the face of escalating sanctions. Investors continued to assess the demand outlook in China as the country set a modest growth target this year, despite dismantling its strict Covid policies.
Gold traded around $1,830 an ounce on Friday as investors cautiously await a key US jobs report which is expected to show hiring slowed in February. However, another strong reading could put pressure on the metal. Gold is set to fall over 1% this week, weighed down by hawkish remarks from Federal Reserve Chair Jerome Powell and stronger than expected US economic data. Earlier in the week the Federal Reserve Chair warned that the ultimate level of interest rates could be higher than anticipated, considering strong economic data and that the US central bank would be prepared to increase the pace of tightening if necessary.
US equity markets
US equity futures fell on Friday, as investors remained cautious ahead of the non-farm payrolls report to be released later today. In Thursday’s regular trading session, The Dow Jones Industrial Average fell 1.66%, while the S&P 500 Index lost 1.85% and the Nasdaq Composite shred 2.05%.
The US economy is expected to have created 205,000 jobs in February, above the 183,000 monthly average between 2010 and 2019 and 100,000 per month considered necessary to keep up with growth in the working-age population. Meanwhile the US unemployment rate will likely be unchanged at 3.4%, matching the lowest level since 1969. Wages are expected to rise 0.3%, the same as in January, however the annual pay growth rate likely accelerated to 4.7% from 4.4%.
Signs of a stronger US economy since the start of 2023 could warrant faster US interest rate hikes, leading investors to believe a 0.5% interest rate hike could be on the cards this month. This will be increasingly likely if we see a strong jobs report later today and if next week’s CPI reading remains elevated. However, a larger than expected increase in jobless claims last week offered some respite from concerns of a stubbornly tight labour market.
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