UK markets and Sterling rose this week after the Labour Party secured a resounding and long-predicted General Election victory, with the FTSE 100 Index gaining 0.41% to trade at 8,260 points at the time of writing.
Investors are hoping that the new government, with its large majority, will bring a period of relative political and economic stability. Labour has won 412 House of Commons seats out of 650, whilst the Conservative party dropped to 121 seats.
Analysts suggest that the modest gains reflect a belief among investors that Labour’s victory draws a line under a relatively volatile period in markets under the Conservatives, including the huge fall in Sterling after the 2016 vote to leave the EU and Liz Truss’ ill-fated “mini” Budget in 2022, which triggered turmoil in the gilts market.
A key selling point of the incoming Labour administration has been its focus on financial stability with investors also hopeful that the potential for planning reform could help boost the UK economy and lift stocks, which have performed much worse than their US and European rivals over the past decade.
Elsewhere, UK shop prices fell between May and June and were little changed from last year, according to sector data that suggests the next government will benefit from a sharp easing in the cost of living crisis.
Prices in stores and supermarkets fell by 0.2% month on month in June, with both food and non-food items registering a contraction, the British Retail Consortium trade body said on Tuesday. Annual inflation, the change in retail prices compared with the same month in 2023, dropped to only 0.2% last month, down from 0.6% in May and the lowest since October 2021.
The Labour government will benefit from the work of retailers to cut their costs and prices, easing the cost of living for millions of households. Food inflation is now lower than at any time since 2021, helped by falling prices for essentials such as butter and coffee, and non-food prices fell from this time last year as retailers sought to boost sales through discounting.
Commodity markets
In the commodity markets, Brent crude futures traded around $87 per barrel on Friday to hit their highest level since April, after the US Energy Information Administration reported a 12.2 million draw in inventories. Analysts polled by Reuters had expected a draw of 680,000 barrels. On Thursday, Reuters reported that Russia’s oil producers, Rosneft and Lukoil will sharply cut oil exports from the Black Sea port of Novorossiysk in July, according to two sources familiar with a loading plan.
Meanwhile, Saudi Arabia’s Saudi Aramco cut the price of its flagship Arab light crude it will sell to Asia in August to $1.80 a barrel above the Oman/Dubai average. The potential price reduction for Asia, which accounts for about 80% of Saudi’s oil exports, underscores the pressure faced by OPEC producers as non-OPEC supply continues to grow while the economy faces headwinds.
Swiss bank, UBS expects Brent crude to reach $90 a barrel this quarter, citing OPEC+ production cuts and projected declines in oil inventories.
Gold Prices traded around $2,360 an ounce on Friday, and are set for a weekly rise, as softer than expected US economic data fuelled hopes that the Federal Reserve could cut interest rates as soon as September.
Equity markets
US equity futures were little changed on Friday as investors look ahead to the ‘nonfarm’ payrolls report due later today. The US economy is set to add 190,000 jobs in June 2024, a decrease from the 272,000 added in May, and the unemployment rate is expected to remain steady at 4%, the highest since January 2022.
The US market was closed on Thursday for the 4th July Independence Day holiday. US manufacturing contracted for a third straight month in June as demand remained subdued, while a drop in a measure of prices paid by factories for inputs, to a six-month low suggested that inflation could continue to subside.
The weakness at the end of the second quarter reported by the Institute for Supply Management on Monday was across the board. Manufacturing is being pressured by higher interest rates and softening demand for goods, though business investment has largely held up. The Institute for Supply Management’s (ISM) manufacturing purchasing managers index (PMI) slipped to 48.5 last month from 48.7 in May.
A PMI reading above 50 indicates growth in the manufacturing sector which accounts for 10.3% of the economy. The PMI remains over the 42.5 level, which the ISM says over a period of time indicates an expansion of the overall economy. Economists polled by Reuters had forecast the PMI climbing to 49.1. The figures indicate a contraction in manufacturing in 19 of the last 20 months. 62% of manufacturing GDP contracted, up from 55% in May.
Eight manufacturing industries, including primary metals and chemical products, reported growth. Machinery, transportation equipment, electrical equipment, appliances and components as well as computer and electronic products were among the nine industries that contracted.
Other economic data released on Wednesday showed that first time applications for US unemployment benefits increased last week, while jobless numbers also rose, pointing to a slowing US economy.
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