The UK stock market has performed well throughout the week following positive data released by China on Monday, and industrial production figures released on Friday, which indicated demand is returning to the resources sector.
A softer Dollar further contributed to the commodity-heavy FTSE 100 rising nearly 2.8% over the week and now trades at 7,719. Figures on Wednesday however showed that the British economy shrank by more than 0.5% month on month in July, much more than the forecasted 0.2%. Services were the main contributors to the contraction. Sterling traded at 1.2457 against the US Dollar at the time of writing.
The European Central Bank (ECB) announced on Thursday its 10th consecutive interest rate hike to its highest level since 1999 and signalled that it is likely done with its tightening policy. The Euro lost 0.5% after ECB policy makers announced the decision to raise rates by 25 basis points, in line with investors’ expectations. In a statement, the ECB said rates ‘have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target’.
Average inflation is expected to be at 5.6% in 2023 and 3.2% in 2024, both higher than previous estimates, caused primarily by higher energy prices. Core inflation, however, has been revised down, with forecasts predicting growth of 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.
Whilst an economic downturn in the Eurozone remains a possibility, the threat of inflation still outweighs the negative impacts of such a downturn, and the ECB has made its intentions clear that getting inflation under control is its main priority.
Equity markets
The annual inflation rate in the US accelerated to 3.7% in August vs 3.6% expected and well above 3.2% seen in July.
Markets initially gave a mixed reaction to this news, however the three major US averages were up marginally on Wednesday midday as traders digested the report and assessed the Fed’s next steps. Figures reinforced speculation that the Federal Reserve will pause rate hikes (97% chance), as the annual core rate continued to decline as expected, however no definitive end has been put in place for the tightening cycle.
As at the time of writing, the NASDAQ traded at 15,473, the Dow Jones at 34,907 and the S&P 500 at 4,505.
Commodity markets
Brent Crude Oil hit its highest level since November 2022 on Thursday, around $93, amid expectations that the global oil market will tighten in the coming months. Saudi Arabia and Russia will be two key contributors to cuts in oil supply, whilst demand is expected to stay elevated in line with expectations for the end of 2023 and through 2024. A report released by OPEC projects deficits of 3.3m barrels per day.
Gold and Silver trade at about $1,900 and $22.50 per ounce respectively. US consumer inflation expectations and the European Central Bank monetary policy committee’s signal on interest rates provided some support for the safe haven assets.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.