Market report: Dollar falls after US debate as Swift weighs in
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “UK growth continued to flatline in July after a lacklustre June but it’s raising the expectations for interest rate cuts, which is giving a little support for UK stocks early in the session. A rise in output from the large services sector was offset by a fall in production and construction during the month. This picture of stagnation is another piece in the jigsaw for Bank of England policymakers to consider when they meet next week. There may be slightly heightened concerns around the table that the economy is on the cusp of a downturn. This will reinforce expectations for two rate cuts in the months to come, but the jury is still very much out when it comes to next week’s decision. Financial markets have been assessing the chance that rates will be kept on hold as above 75%, so this data point alone is unlikely to move the dial significantly.
Economies have already felt the force of the Taylor Swift effect on spending patterns, now investors are assessing that her star power could help move the dial on the US election. The dollar fell back against a basket of currencies as the first US presidential debate ended, and the music icon endorsed Kamala Harris on Instagram. Signing off as ‘childless cat lady’, it was a dig at a term used by Trump’s pick for Vice President JD Vance to describe leading Democrats. Swift highlighted rights for women as core to her decision, with Kamala Harris’ impassioned stance on abortion one of the highlights of the debate. Taylor Swift has 284 million followers on Instagram, and inevitably the country most associated with her account in the United States.
The currency movements reflect an expectation that following the performance of Harris in the debate, and Swift’s endorsement of her, that there is a slightly lower chance of a tariff-supporting Trump in the White house. Trump has said he would impose a universal 10% tariff on imports and raise tariffs on Chinese goods by around 60%. This would push up prices for companies and consumers, and resulting higher inflation could prompt interest rates to stay elevated, supporting the dollar. But with the debate expected to have given Harris a leg-up in the polls, it led to fresh weakness for the greenback. Attention now will turn to the US consumer price report due out later, which could give investors clues about just how hefty an interest rate cut could be next week. Most bets are still on a 25 basis point reduction, with the odds at 34% for a larger 50 bps cut. US ‘core’ consumer prices are expected to have risen 3.2% in August. Anything close to that number is likely to see expectations for next week’s rate decision by the Fed continue to favour a quarter point reduction, but if CPI undershoots the chances of a deeper cut could strengthen
Brent crude has gained back some ground amid concerns about short term supply due to storms in the US Gulf region. However, the benchmark remains below $70 a barrel, hovering near the lowest level since December 2021. Concerns about decelerating economy in the US and ongoing weakness in China continue to keep the downwards pressure on oil prices. As more drivers in China opt to go electric, there are big questions surrounding future demand for fuel, while manufacturing weakness also has weighed on prices.
AWS, the cloud computing powerhouse driving Amazon’s growth is expanding its empire in the UK. It’s planning to invest £8 billion to maintain and operate data centres in the UK as part of a five-year programme. This announcement will be music to the ears of the government, which pledged to work with the private sector to increase investment in the UK and help boost the economy. These centres will form part of the backbone of the AI revolution, as models need huge pools of reliable data to work effectively. With this the new wave of AI demand, computing power is a hot commodity. This deal, which will be a small part of the spending pie, demonstrates that it’s not cheap to keep building out the new infrastructure to service rocketing demand. Investment is set to ramp up over the coming quarters and that is starting to have an impact on profit guidance. Revenue must keep accelerating for the huge sums being spent to be worth it.
REA Group’s bid for Rightmove was highly opportunistic and so it’s little surprise that it’s been rejected for fundamentally undervaluing the company and its future prospects. Its easy to see why REA Group was interested. REA Group runs property websites and indices across Australia, Asia and North America, so getting a dominant foothold in the UK would be very attractive. Its interest is also likely to have been driven by the significant drop in Rightmove’s share price from the peak in December 2021. Another higher offer from REA Group can’t be ruled out, and this may already have opened a stream of other interest, with private equity firms potentially first in the queue. Sentiment around the property sector has been improving with interest rate cuts eyed on the horizon. However, there are still risks ahead to this model. The number of estate agents is falling, as DIY alternatives grow in popularity and more estate agents look set to be forced out of business. This could hamper the ability to cross-sell premium advertising packages, right now though today’s estate agents can ill afford not to advertise on Rightmove.
Dunelm has proven to be a nimble operator amid the economic headwinds which have put off shoppers from splashing out on bigger ticket items. When there are plenty of good value cushions, rugs and homewares to choose from, shoppers still have been leaving with armfuls of goods. Sales were up 4.1% compared to last year, coming in at £1.71 billion. This was driven by higher volumes of goods being shifted and it’s helped Dunelm grab more market share. The position of Dunelm stores in easy to park retail centres helps the proposition and the six new shop openings have helped deliver higher sales. This has given the company more confidence about extending its rollout plan with 5-10 new store openings expected annually for the medium-term. However, it’s still tough in the discretionary sector and Dunelm says it still sees a challenging consumer environment ahead. So, flogging the more expensive sofas is likely to be an uphill struggle, which is why it’s focus on selling essentials to cash-strapped students and renters is a savvy strategic move, as long as volumes stay high.
Heathrow has set a fresh record in terms of passenger numbers, with August proving to be the busiest month ever as eight million people used its terminals. There had been concerns that travellers would start to baulk at paying high prices for flights this summer, but it seems the surge in demand for holidays is continuing. The damp British weather is likely to have prompted a late surge in demand for a place in the sun. The interest rate cut in early August, and more expected on the horizon may also have given families that extra bit of confidence that their finances would continue to improve. Many people are continuing to ring-fence budgets to travel and enjoy themselves, with post-pandemic behaviours for now showing little sign of abating.”
