Alice through the looking glass moment for UK economy and oil prices show muscle
- The UK economy shrinks by more than expected in July, pushing down the pound.
- US inflation numbers, out later, will set the tone for trading on Wall Street.
- Brent crude trades around $92 a barrel as supply concerns swirl.
- BP shares set for rocky trading day after shock resignation of the CEO Bernard Looney.
- Tesco and Sainsbury’s fend off competition from discounters and win back slivers of the grocery pie.
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The UK economy is having an ‘Alice through the looking glass’ moment, and has sharply turned from being larger than expected to shrinking fast. Output contracted by 0.5% in July, against the 0.2% fall expected for the month. The cost-of-living crisis, high borrowing costs, bad weather and strikes have all conspired to be a bitter potion. This gloomy picture comes in sharp contrast to the more upbeat revision which came through from the ONS at the start of September, which indicated that the economy was significantly larger at the end of 2021 than previous estimated. Although this data doesn’t include those upwards revisions, it’s clear we are now further away from slightly sunnier uplands, as inflation and high interest rates have eaten away at resilience of companies and consumers. Nevertheless, with wage growth still hot and fuel prices higher, it still looks likely that the Bank of England will raise interest rates again next week from 5.25% to 5.5%. But it may well be the end of the hiking cycle, given that unemployment has also ticked up, companies are showing more reluctance to hire staff and we have still yet to feel the full effect of previous rate increases. The expectation that interest rates won’t go so high has pushed down the pound slightly against the dollar. It’s currently trading around $1.245: levels last seen in early June.
Beefed up oil prices are still showing muscle and are set to keep providing support for energy stocks. The benchmark Brent Crude has jumped to levels not seen for ten months, as the extended cuts by Saudi Arabia and Russia are set to constrain output over the coming months. OPEC has predicted a shortfall in supply of 3.3 million barrels a day over the last quarter of the year as increasing demand collides with lower supply.
The prospect of an ongoing stint of higher energy prices will fuel speculation that the US Federal Reserve might be inclined to go for another interest rate hike later in the year, with a pause still expected next week. Already rising fuel costs are expected to drive up the headline rate of inflation from 3.2% to 3.6%. This will be hard to ignore by Fed policymakers even if core prices, minus volatile food and fuel prices, show signs of slowing further, with a drop from 4.7% to 4.3% largely expected. This expectation pulled down the value of tech stocks on Tuesday and investors are now bracing for the CPI numbers, which will set the tone for trading on Wall Street.
The higher oil price might limit some of the fallout from the shock resignation of the CEO of BP, Bernard Looney, but this is a highly unwelcome turn of events for investors given his long tenure at the company and his pivotal role at the helm as it navigates the tricky transition to greener energy. This crisis at the top of BP also demonstrates how governance, not just environmental considerations, loom increasingly large when it comes to ESG criteria and why potentially misjudged relationships are considered as a risk to corporate reputation. Change at the top is always unsettling and the abrupt nature of his departure will intensify reactions, particularly as it comes at such a sensitive time in the company’s strategy.
Three years ago this week, Bernard Looney told investors of his ambition to reimagine energy for the people and the planet, explaining why reducing oil and gas production by 40% by 2030 was the right thing to do. But since then, BP has edged away from that commitment and its carbon emission reduction target from 2019 to 2030 for oil and gas production has been cut to 20-30%. His successor is likely to continue with the argument that investment in oil and gas will help smooth out pricing and ease an energy transition rather than risking volatility through sharper reductions. But this won’t go down well with responsible investors, and also poses a risk to BP’s longer-term valuation if mainstream investors can’t be convinced of its ESG credentials.
The scrap among the supermarkets to win over cash-strapped shoppers is intensifying, and the big grocers appear to be gaining ground on the discounters. Thanks to a razor-sharp focus on keeping prices down Tesco and Sainsbury’s are not just fending off rivals, but winning back slivers of the grocery pie. Tesco is the biggest beneficiary, seeing an increase in its market share over the period nudge up from 27% to 27.2%. Sainsbury’s hasn’t seen change over the month, staying at 14.8% but this was an increase on the 14.6% per cent achieved a year ago.
Tesco’s huge scale is helping to power its value offering with deep-rooted nature of its supplier relationships also ensuring it can stay as competitive as possible. Shoppers who remember to set out with loyalty cards tucked into wallets or present on their smartphones are beneficiaries of lower prices, while those who forget to go armed are punished with much higher bills at the tills. Expanding Aldi price match promotions are also clearly paying off, enabling the grocers to retain shoppers’ loyalty and discourage them from shopping around.”
