Caution as police swoop on Chinese property giant and interest rates are in focus
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A watchful mood is settling ahead of the key interest rate decisions this week amid wariness about the latest twist in the Chinese property crisis. The FTSE 100 has opened flat, with little to spur investors’ interest as they remain cautious ahead of key central bank meetings.
The detention of Evergrande employees, working in wealth management, has prompted a big slide in the real estate giant’s share price amid nervousness that fresh fragilities will be uncovered. Authorities are swooping deeper into the internal workings of the company, as worries swirl about the sector’s woes potentially causing pools of financial instability elsewhere requiring fresh patch-ups, which could further drag down economic growth.
Attempts to stem the slowdown in China through stimulus measures do appear to be bearing some fruit with Friday’s data on industrial production and retail sales rising more than expected and there are expectations more help could be on the way. China’s remedial work on bolstering its economy alongside expectations of supply constraints in the coming months as production cuts by Saudi Arabia and Russia are felt more acutely, are helping push up the oil price, with Brent Crude trading, above $94.5 a barrel, hovering around levels not seen for ten months.
Higher energy prices risk keeping headline inflation higher, but that’s unlikely to move Fed officials away from their cautious stance with week, particularly given that the annual rate of core inflation, stripping out volatile food and fuel prices, has been falling. The interest rate hike medicine has been working, and they won’t want to administer more than necessary in fear of prompting unnecessary side effects across the economy. The focus is moving to what will be on the prescription in November and when cuts will come, and the Fed is likely to stress that these decisions will be driven by upcoming data.
The Bank of England is expected to proceed with another hike on Thursday, given that wage inflation is still considered to be far too hot to ignore. Wednesday’s inflation snapshot will be closely watched for signs that core inflation, which strips out the volatile food and energy prices, is still proving sticky. However, the cost-of-living crisis, high borrowing costs, bad weather and strikes all conspired to cause the economy to contract in July. Residential rents are now rising at their fastest rate on record, chipping away more consumer resilience. Monthly rents are on average 12% higher than they were just a year ago according to Hamptons, as people put off house moves, and competition intensifies, and landlords hit by higher borrowing costs charge more. The stage is set for more demand to be squeezed out of the economy, which should help limit price rises in the economy going forward. So, the September rate decision may well mark 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. But higher rates are set to linger given that the 2% inflation target still seems so far away, so right now a cut isn’t expected until at least the second half of next year.
Reports that another British microchip company Imagination Technologies is heading Stateside for an IPO is another blow for London, but it’s certainly not a surprising move given tech’s might on Wall Street and the UK’s ongoing struggle to compete. Imagination Technologies went private in 2017 when it was purchased by Canyon Bridge, which is backed by the state-owned Chinese fund Yitai Capital. Given Arm’s successful debut on the Nasdaq last week, and the surge of interest in chip companies amid the AI frenzy, Imagination’s owners clearly want to capitalise on the zeitgeist. It shows that the global IPO machine is moving up a gear after the downturn, but London is still struggling in the slow lane, with no major listings planned for this year.”