Market report: Another trade truce for the US and China as the UK awaits Spending Review
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A cautious mood is descending on the London market as investors await details of spending decisions which are set to be crucial for the UK economy. They are also assessing a downbeat view for the global outlook from the World Bank, which foresees the weakest decade of growth since the 1960s. There’s some optimism about the outcome of trade talks between the US and China but, given it’s largely an agreement to stick to the previous plan for compromise, it’s not set to move the dial much for the FTSE 100. Brent Crude is tracking downwards, hovering below $67 a barrel, amid the forecasts of clouds gathering over the global economy. An industry report from the US Energy Information Administration also indicated there’s set to be a larger build up in oil stocks this year, than it expected just a month ago.
Focus will be trained on bond market reaction to chancellor Rachel Reeves’ plan to boost capital spending on infrastructure but keep a tighter rein on the day-to-day spending of departmental budgets, while ringfencing funding increases to health and defence. 10-year and 30-year gilt yields, which are watched closely for any signs of a bond market strop out, have dropped back in recent days. It may partly be due to a weakening labour market raising hopes that forecasts for more interest rate cuts will stay on track. But so far, the headlines released about spending commitments appear to have kept investors in UK government debt on side, but details will be dug through, particularly when it comes to capital spending commitments.
The bargaining chips have been dealt and negotiators from the US and China have agreed to prolonging their trade truce, even though they are still not taking threats completely off the table. The progress lifted indices in Asia and US futures point to a positive start to the session. A framework agreed will remove China’s export restrictions on rare earth minerals critical for manufacturing, especially for the auto industry, in return for a sharp reduction of scrapping of triple digit tariffs on Chinese imports. But these agreements still need to be ratified by Xi Jinping and Donald Trump and, given the US administration’s deep unease about China’s technological prowess, the screws will still stay tighter on Chinese imports. Opposition to the blanket tariffs is going through the courts but it looks likely that that Trump will find a way to ensure the duties on Chinese imports will stay at around 30% so trade barriers will still be significantly higher than just a few months ago. The World Bank has warned that this will lead to a sharp slowdown for the US and keep inflationary pressures higher. But the United States is set to avoid recession and investors in US equities still appear to be largely shrugging off the warnings, with appetite for global tech giants, which hold huge sway on indices, remaining resilient.
McDonalds has stumbled as demand for weight loss jabs has accelerated. Shares in the fast-food giant slipped back after an analyst downgrade from buy to sell from Redburn Atlantic which cited the popularity of GLP-1 medicine for the move. It comes soon after Morgan Stanley also downgraded the company from “overweight” to “equal-weight” this week. It saw economic concerns, constrained consumer budgets and its recent higher valuation as negatives for the company. As more Americans take the weight loss drugs, they are expected to lose appetite for big macs and French fries, with eating out becoming a turn off. Multiple those behaviour changes over months and years, with increasing numbers of overweight people set to join the weight-loss drug revolution, then it could add up to a big dent in revenues. The advent of obesity drugs has already decimated Weight Watchers, with its stock plummeting as people have switched from healthy eating regimes to hunger suppressing jabs. It also has the potential to affect ancillary services like takeaway delivery firms which rely on demand for fast food.’’
Heathrow Airport is continuing to enjoy a new golden age of travel, as post pandemic pent-up demand shows little sign of easing off. Neither trade turmoil nor geopolitical conflict put off international travellers, with the hub posting yet another record month for passenger numbers. 7.2 million passengers travelled through the terminals, marking the busiest May on record. The airport is set to use this continued growth to bolster its argument for a third runway, with detailed plans set to be submitted this summer. With Rachel Reeves keen to pull all growth levers possible to boost the economy, tapping high interest in globetrotting looks likely to be more of a priority, than environmental concerns.”