It has been another volatile week for UK markets, with the FTSE 100 Index falling by 0.4% to trade at 6,913
points at the time of writing.
UK shares managed to recover some ground on Friday, after Prime Minister Liz Truss dismissed Chancellor, Kwasi Kwarteng, as she prepared to carry out a dramatic U-turn on his mini budget, in a desperate attempt to rebuild market confidence.
The £43 billion package of unfounded tax cuts unveiled late last month caused a historic market turmoil, and Truss will likely be looking for the new Chancellor to steady the markets.
Meanwhile, the Bank of England’s emergency bond-buying scheme, which was used to cover pension funds caught up in the market chaos sparked by the tax cuts last month ends on Friday as expected. The yield on Britain’s 10-year Gilt fell below 4% on Friday, down from a near 14-year high of 4.63% on Wednesday, having been under extreme volatility since the announcement of tax cuts and unprecedented support on energy bills without saying how they would be paid for.
The British Pound traded below $1.12 on Friday, having been under heavy selling pressure over the last few weeks, amid persistent concerns about the country’s economic outlook. High inflation and doubts about whether the Bank of England will be able to protect the economy continued to weigh on Sterling, at a time the US Federal Reserve continues with its hawkish stance, sending the US dollar higher.
Commodity markets
In the commodity markets, Brent crude futures traded around $93 per barrel on Friday and are down
approximately 4.5% so far this week, having come under renewed pressure from a weakening demand outlook
due to surging inflation, tightening financial conditions and mounting risks of a global recession.
Earlier this week, OPEC+, the US Energy Department and International Energy Agency all slashed their global oil demand forecasts in their monthly reports. Adding to concerns about softer demand was official data showing that US
crude inventories surged by 9.9 million barrels last week, far ahead of market expectations for a 1.8 million
barrel rise.
Weak demand from top oil importer China as it continues with its zero-Covid policy also reduced the outlook for oil prices. Gold traded around $1,655 an ounce on Friday after plummeting on Thursday as higher than expected US inflation data increased the likelihood of another large Federal Reserve interest rate hike next month.
Due to its weak position in an environment of rising interest rates, investors continue to turn away from gold, opting for the Dollar as a safe store of value during these times of surging inflation and heightened economic uncertainties.
US equity futures
US equity futures were mixed on Friday, after all three major averages staged a dramatic reversal rally during
Thursday’s session. In regular trading on Thursday, the Dow Jones Industrial Average and the S&P 500 Index
rallied 2.83% and 2.6% respectively, whilst the Nasdaq Composite Index gained 2.23%, after falling as much as
3.15% earlier in the day.
Consumer prices in the US increased by 0.4% month-on-month in September 2022, the highest reading in three months and twice market expectations of 0.2%. This initially caused a market selloff as it confirmed views that the Federal Reserve would push ahead with aggressive tightening plans.
However, stocks came roaring back later in the day, with analysts attributing the move to short-covering and
put options moving into the money as two potential suspects for the potential rebound. The larger than
expected increase in inflation leaves the Federal Reserve with little choice but to press ahead with a fourth
consecutive 0.75% increase at its upcoming policy meeting in early November. Economists now believe
inflationary pressures are likely to push the US central bank to continue its supersized rate rises beyond that
point, and at least until there is more clear-cut evidence that price pressures are easing.
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