Market report: Fresh tariffs threats knock sentiment while UK economy contracts
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Donald Trump is rattling sabres in his trade war again, causing more nervousness to creep into sentiment. The US president has ratcheted up threats against Canada promising duties of 35% on imports, while blanket tariffs of 15-20% are being planned for other nations. The baseline assumption is that these will eventually be negotiated down, and that’s it’s a tactical ploy. Nevertheless, there is plenty of weariness around about the more fractured nature of trade relationships in the Trump era. There had been hopes that the EU had inched closer to a deal with the US, but it remains elusive for now, with the President telling leaders to expect a letter detailing new tariffs terms today or tomorrow.
Some shine looks set to come off the FTSE 100, after the index shot to a fresh record closing high, with lacklustre performance expected in early trade. Amid higher trade tensions, the latest growth snapshot for the UK may act as a bit of a drag on confidence. The economy contracted in May by 0.1%, with a drop in production the main culprit for the contraction. This is a set-back for chancellor Rachel Reeves who is already wedged in between a rock and a hard place when it comes to the public finances. A fall in activity is likely to hit tax receipts, just at a time when there’s a bigger hole to fill after the government was forced to backtrack on spending cuts to welfare.
However, the Footsie still looks set to cling onto the bulk of yesterday’s gains. There remain hopes that despite the trade bluster from Trump, the tariffs won’t weigh on the global economy as much as had been feared, especially as new trading relationships are being forged. The defensive nature of the FTSE 100 is also well-positioned for any rotation out of the US, as investors look to diversify and insulate their portfolios against Trump induced turmoil and potential volatility among the tech mega-caps. The UK was the first to do a trade deal with the US and although fiscal challenges remain for the government, the UK’s reputation for stability has been shored up. With a longer-term growth plan in the works, it set to keep sentiment largely on side.
Oil prices have trod higher as geopolitical concerns continue to swirl. Attacks on vessels in the red sea by Houthi rebels have keep concerns about supply disruptions from the in Middle East alive. Nevertheless, trade uncertainty is expected to keep a lid on prices, with OPEC lowering its global demand forecast for future years. The tariff turmoil unleased has caused a headache for BP. The oil major released forecasts in its trading update that lower prices will hit it second quarter results. In its oil production and operations business, it is set to have an impact in the range of between $600 to 800m, while its gas and low carbon energy segment will take a hit of between $100 and 300m. However, net debt is coming down, refining margin is improving and there will be comfort from the upstream production increases showing that the strategy reset is bearing some fruit. The company’s future profits remain intrinsically linked to oil & gas prices, over which it has no control. It shows the importance of BP not completely abandoning ambitions in the green energy space whilst being selective in its approach.’’