FTSE 100 falls as oil, inflation & bond yields keep markets on edge & Shein stumbles on IPO catwalk
Susannah Streeter, chief investment strategist, Wealth Club: “The Tuesday after a bank holiday is always a struggle, and that’s playing out on markets, with the Footsie falling sharply in early trade. It’s an unsettling start to September, with the mood tested by renewed conflict between the US and Iran, keeping worries bubbling about high energy costs, inflation and debt, and the knock-on effect on growth.
Brent crude, the benchmark, has climbed to hang around $91 a barrel after hostilities erupted again in the Middle East. US forces struck Iranian rocket launchers on Larak Island in the Strait of Hormuz, prompting retaliation from Tehran, including missile attacks on two US bases in Jordan. With Trump now threatening further action against Iran, including against Kharg Island, Iran’s key oil export hub, supply worries are once again front and centre. Shipping levels through the Strait of Hormuz have dropped markedly, underlining the chronic nature of the disruption, with hopes of a resolution repeatedly dashed.
This is the awkward backdrop for the G20 summit, with finance ministers grappling with an energy squeeze that’s continuing to pile on inflationary pressure. US treasury secretary Scott Bessent has blamed weak investment, poorly designed tax systems and skills gaps for sluggish global growth, while talking up America’s own numbers, with US growth benefiting from a wave of AI infrastructure investment.
They are likely to have been highly irritating remarks for other countries, given that the Iran conflict has induced an energy crunch which is holding back growth. Eyewatering sums are being poured into creating the backbone for the AI revolution, helping to power the US economy, but there remain questions about the future returns from this mega investment cycle. And while that spending is boosting growth, it is also adding to inflationary pressures and sucking in vast amounts of capital.
The Fed is increasingly wary about those inflationary pressures, with Chair Kevin Warsh at Jackson Hole on Friday saying that the Fed would have work to do if underlying inflation does not move clearly and sufficiently quickly towards its 2% target. Although he stopped short of giving explicit forward guidance, his comments have still raised expectations of a rate hike in September. So US government borrowing costs are climbing again, with the yield on the 10-year Treasury note rising above 4.78%, a near 20-month high. With bond markets so closely interlinked, what’s happening Stateside is also showing up in UK government borrowing costs, which have taken another sharp turn upwards.
It’s clear that investors are increasingly wary about government debt piles, and the sheer scale of the AI investment boom adds another complication. Huge amounts of capital are being funnelled into data centres, chips and the infrastructure needed to build out AI, money which might otherwise have found its way into government bonds. That is adding to the competition for capital and helping to push up yields as investors demand higher returns elsewhere. Although Bessent’s message to his fellow finance ministers was to fix their own economies, there are big risks in the AI investment cycle, particularly if the returns fail to live up to the huge sums being poured into it.
And Shein has stumbled on the IPO catwalk, with investors spotting loose threads which risk unravelling the apparel giant’s dominance in the fast-fashion scene.
After the long-awaited launch in Hong Kong, shares fell as much as 10%, sliding to HK$43.72 from an IPO price of HK$48.56. That briefly pushed the company’s valuation below $25bn, although it had been valued at around $26.5 billion at the IPO price. That’s a far cry from the nearly $100bn valuation it enjoyed at its pandemic-era peak in 2022. At around $26bn, Shein is still one of the world’s most valuable fashion companies, but it is now worth roughly the same as H&M and a fraction of Inditex, the owner of Zara.
The sheen has been rubbed off, as the formula that propelled its extraordinary rise is coming under increasing strain. Shein swung to a $99m loss in the first quarter, from a $395m profit a year earlier, while revenue growth has slowed. The headline loss was heavily affected by a $328m fair-value accounting charge on convertible preferred shares, but even stripping that out, the picture is far from dazzling, with the US, its biggest market, proving particularly challenging.
One of Shein’s biggest competitive advantages is also being eroded by changes to the rules of the game. The US has ended the de minimis exemption that allowed low-value parcels to enter without customs duties, hitting Shein and rival Temu particularly hard. Their business models have been built around shipping vast numbers of inexpensive individual packages directly to consumers, so adding costs at the border strikes at the economics underpinning the whole proposition.
And the squeeze is spreading given that the EU has already introduced a temporary €3 customs duty on low-value parcels, while the UK is also preparing to tighten its small-parcel customs regime by removing the current £135 customs duty relief. That could gradually chip away at Shein’s huge price advantage over established high-street rivals such as H&M and Primark.
There is also a bigger question about whether ultra-fast fashion still has the same pulling power with consumers. The resale market has expanded dramatically over the past decade, giving shoppers access to better-known and often more expensive brands at much lower prices, while concerns about the environmental and social impact of disposable clothing have also become harder for the industry to ignore.
Shein is still a formidable force, with a huge global customer base and a data-driven model that has transformed how trends are spotted and clothes are brought to market. But the catwalk has become much more crowded, the regulatory spotlight is intensifying, and investors are increasingly wary about just how long the era of ever-cheaper, ever-faster fashion can continue.”