Market report: Brent Crude rises, UK growth revision and Aston Martin’s production woes
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’The FTSE 100 has been flat in early trade with little Monday motivation to propel it forward. Sentiment is subdued amid heightened tensions in the Middle East and a revision downwards of UK growth for the second quarter. However, although this latest snapshot of the UK economy doesn’t, on the face of it, look inspiring, it may bolster the case for further interest rate cuts. Financial markets are putting the chances of a rate reduction next month at more than 88%. The data also shows that there was an increase in business investment, which rose by 1.4% in Q2. Companies putting a bit more money into equipment, infrastructure and intellectual property is a small move, but is still an encouraging trend, essential for longer-term growth. The housing market is also on an arc of recovery, with prices jumping by 0.7% in September, and are up 3.2% in a year, according to Nationwide. This is the fastest rate of growth in two years, helped by incomes outstripping inflation and the rates on mortgage deals coming down.
Oil prices have been climbing as Israel’s bombardment of Lebanon and Yemen has intensified, fanning flames of concern about an escalation of conflict in the Middle East. Brent Crude rose 1.5% to $72.5 dollars a barrel as supply worries ratcheted up. Israeli prime minister Benjamin Netanyahu has warned Iran, which has backed Hezbollah, that it could also become a target. This could affect the distribution of oil from Iran and the passage of tankers through the Strait of Hormuz, a key route for global crude supplies. However, a lid is being kept on prices, with Saudi Arabia expected to increase production this year and demand for oil in China, having fallen back, amid the country’s economic struggles.
Chinese stocks have held onto their rally, as hopes that the big stimulus whammy from the central bank, will help revitalise the economy. The People’s Bank of China has added another bit of punch to the package of measures aimed at curing the property market’s malaise. It’s now ordering banks to reduce mortgage rates for existing home loans, in addition to the other lending measures put in place last week. The latest manufacturing snapshot shows why the authorities have stepped up efforts to encourage investment. The Caixin China manufacturing PMI dropped to 49.3 in September, with anything under 50 flagging a contraction. The downturn in new orders shows just how difficult it’s been for factory owners, amid such weak demand.
US interest rate watchers are waiting for US chair Jerome Powell’s speech in Tennessee later. He’s talking to the National Association for Business Economics and investors will be analysing his words for any further clues about the potential for another super-size rate cut in November. The yield on US 10-year treasuries has dipped back, in expectation that the Fed will stay steadfast to a rate-cutting path. The Fed’s preferred measure of inflation in the economy, the Personal Consumption Expenditures Index didn’t rise, as forecast on Friday, but dipped back. Although S&P futures are flat, stocks on Wall Street are hovering around record levels, as investors eye up lower borrowing costs ahead, while the economy isn’t slowing in a scary fashion. The key monthly jobs report out on Friday will be closely watched, with the weekly data pointing to resilience in the labour market, but any signs of fresh weakness, could set off worries again about a recession.
Aston Martin is a prime example of how China’s economic woes have been making well-off Chinese consumers more cautious. The property crisis has affected perceptions of wealth and put people off buying big-ticket items, like high-end cars. Weak demand from China is partly why it’s sharply cut production this year, with around one thousand fewer cars expected to roll off production lines than planned. There are hopes that the’ kitchen sink’ stimulus plan will help restore confidence in the economy and help turn around the fortunes of other luxury goods companies, like Burberry, which saw another lift in its share price in early trade. While aspirational shoppers might shell out for a handbag, a luxury car is a bigger decision altogether. It’s clearly going to be a longer road ahead for Aston Martin and investors are clearly super-disappointed by its latest troubles, with shares falling by more than 13% following the profit-warning.
With more here’s my colleague Aarin Chiekrie, equity analyst, Hargreaves Lansdown: ‘’Underlying cash profits (EBITDA) are now expected to finish behind last year’s level, and the group no longer expects to become free cash flow positive in the second half. Newly minted CEO Adrian Hallmark says that after a month behind the wheel, previous growth targets were ambitious but he remains confident in Aston Martin’s growth potential.
Fellow automaker Stellantis also issued a profit warning this morning, with the picture there arguably looking much more bleak. Aston Martin’s downgrades aren’t quite as drastic when put side-by-side with this. Its higher price point has arguably offered it some slight protection from general auto trends given its buyers aren’t typically short for cash. Next year’s guidance remains unchanged for now, but the valuation’s likely to come under further pressure until it can prove that the demand outlook remains on track.”
