UK markets rose this week as investors welcomed a softer than expected US inflation reading, with the FTSE 100 Index gaining 0.7% to Trade at 7,350 points at the time of writing.
The British Pound gained more than 4% to trade at $1.17, as investors turned to riskier currencies after the US consumer price inflation report showed that the inflation rate reduced more than expected last month, paving the way for the pace of interest rate rises to slow.
The yield on the UK’s 10 year gilt fell to around 3.3%, its lowest level since September 20th, with investors anticipating a less aggressive stance from the US Federal Reserve.
On the economic data front, the British economy shrank more than expected in September and contracted for the first time since the start of last year, suggesting the country has entered what is forecast to be a prolonged recession.
Data from the Office for National Statistics revealed that GDP fell by 0.6% between August and September, a larger drop than the 0.4% forecast by economists polled by Reuters. With the economy also contracting in August, GDP fell 0.2% between the second and third quarter, the first quarterly contraction in over a year.
Commodity markets
In the commodity markets, Brent crude futures traded around $96 per barrel on Friday and are heading for a slight weekly loss, pressured by US crude inventories rising by 3.9 million barrels in the last week to 440.8 million barrels, the highest since July 2021.
Earlier in the week, fresh Covid outbreaks in top oil importer, China reignited fears that authorities would stick with the zero Covid policy. However, news on Friday that China is relaxing some of its stringent Covid restrictions lifted the outlook for oil demand.
Gold prices soared above $1,760 on Friday, gaining over 6% in the last week, after the lower than expected US Consumer Price Inflation reading pushed down the Dollar, amid prospects that the Federal Reserve is nearing its peak of interest rate increases. Investors are now betting on a 0.5% rise in interest rates next month, as the fall in inflation will ease the pressure on the Fed to put up US interest rates by another 0.75%.
US Equity Markets
US equity futures rose on Friday after all three major stock indices posted their biggest one-day rally in over two years in Thursday’s regular trading session. US equities were bolstered by a weaker than expected US inflation reading which raised hopes amongst investors that the Federal Reserve will slow the pace of rate hikes at upcoming meetings.
The benchmark S&P 500 jumped 5.54%, the Dow Jones Industrial Average gained 3.7% and the Nasdaq Composite soared 7.35%, with all three indices on track for a weekly gain. The annual inflation rate in the US eased for a fourth straight month to 7.7% in October, rising at the slowest pace since January, and coming below expectations for a milder drop to 8%.
US treasury yields also declined sharply as investors revised expectations for the terminal rate lower, with the benchmark 10-year US yield dropping towards 3.8% for the first time in over a month. As a result, the Dollar traded sharply lower to a level not seen since mid-August.
The inflation data followed unexpectedly tight midterm elections, that left the battle for control of Congress still hanging in the balance. Some investors urged caution, sighting that the rally in equities was premature with markets desperately looking for signs that the Fed is going to pivot.
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