UK markets pulled back this week, with the FTSE 100 Index falling by 1.24% to trade at 8,270 points at the time of writing.
UK economic growth will accelerate this year and through into 2025, as falling inflation and interest rates strengthen domestic demand, according to the International Monetary Fund. The UK economy will grow by 1.1% this year, a 0.4% upgrade on its previous projections and by a further 1.5% in 2025, the third-strongest forecast among the G7 group of advanced economies, the IMF said in its latest World Economic Outlook report.
The figures provided a boost to Chancellor of the Exchequer, Rachel Reeves ahead of her first budget next week. However, Reeves cautioned that there was “more work to do” as the improved growth is unlikely to alleviate the need for big tax rises in the Budget on 30th October, when she is looking to close a funding gap of about £40 billion.
Bank of England Governor, Andrew Bailey said this week that inflation is fading more rapidly than central bankers expected, but the UK needs to see a continued retreat in services price growth from current levels. Bailey said that consumer price growth falling below the Bank of England’s target to 1.7% in September was a ‘good story’ when it came to slowing headline inflation but warned that services inflation remained above levels that are consistent with the central bank’s objectives. He added that questions were still outstanding as to whether the economy had achieved structural change that could make services inflation stickier. He also said that he was seeing ‘caution and uncertainty’ among UK households, despite increases in real incomes, adding this was reflected in high savings rates.
Commodity markets
In the commodity markets, Brent crude futures traded around $75 per barrel on Friday and are set for a weekly rise, as the Middle East conflict and reports of North Korean troops ready to help Russia in Ukraine kept investors on edge ahead of the US presidential election.
On Wednesday, the US said it had seen evidence for the first time that North Korea had sent 3,000 troops to Russia for possible deployment in Ukraine, a move that could mark a significant escalation in the Russia/Ukraine war.
In the Middle East, an exchange of heavy fire between Israel and Hezbollah heightened supply concerns, as Israeli strikes also hit the Syrian capital Damascus on Thursday, Syrian state media reported. This escalation comes as Washington makes a push for peace between Israel and Iran-backed groups Hezbollah and Hamas before the November 5th US presidential election that could alter both its Middle East and oil policy. Trump is currently leading over Harris based on current data from betting markets and he has proposed making the US a major oil supplier, which could depress prices.
Gold prices traded around $2,740 an ounce on Friday, breaking further records this week, as US election jitters and Middle East tensions boosted demand, despite the Dollar lingering near a three-month high. A stronger dollar makes gold more expensive for other currency holders.
Equity markets
US equity futures were little changed on Friday, after the major averages ended mixed in the previous session.
In Thursday’s regular session, the Dow Jones Industrial Average fell -0.33% for its fourth straight downward session, meanwhile the S&P 500 rose 0.21% and the Nasdaq Composite advanced 0.76%. The International Monetary Fund warned that greater global protectionism will endanger the world’s growth outlook, as a possible Donald Trump victory in next month’s US election raises the prospect of sharp tariff increase.
In its latest forecasts, the IMF said it expected the world economy to expand 3.2% both this year and next. However, its World Economic Outlook cautioned that if higher tariffs hit a “sizeable swath” of world trade by mid-2025, it would wipe 0.8% from economic output next year and 1.3% in 2026. Trump has called for an overall 20% tariff on all US imports and a 60% penalty on Chinese goods, moves many economists worry could set off a global trade war. His rival Kamala Harris has also backed higher tariffs for some Chinese goods during her term but opposes the sweeping duties championed by Trump.
The US Dollar rallied to its strongest level since August this week, boosted by a recent string of economic data and investor bets that Donald Trump’s chance of winning next month’s presidential election is on the rise. The currency has climbed nearly 4% since late September against a basket of rivals, helped by strong US job figures earlier this month that prompted investors to scale back expectations for Federal Reserve rate cuts. Trump has indicated his desire to weaken the dollar, but investors have long thought his economic policies will do the opposite, particularly if the Republicans manage to win the White House and both houses of congress. Trump’s economic policies tend to be associated with inflation, and as a result, point towards a less aggressive rate-easing cycle from the Federal Reserve over the next few years. Expectations of slower interest rate cuts by the US central bank have fuelled a sell-off in longer term US treasuries, with the yield on the 10-year government bond reaching 4.22% this week, its highest since July.
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