Market report: Geo-political risk and central banks set to dominate
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The FTSE 100 has eked out a positive open but is set to tread water at the start of a week which will be largely dominated by key central bank meetings. Rising geo-political risk is concentrating minds, while a more slightly positive outlook for China’s economy emerges. Although policymakers at the Fed and the Bank of England are still expected to sit on their hands and hold off from reducing rates, comments from the committees will be closely scrutinised for further hints about when cuts will come.
Inflamed tensions around the world are pushing up the price of oil. Brent Crude rose towards $86 a barrel, as traders assessed the deepening conflict in Gaza, with Israel’s prime minister Benjamin Netanyahu vowing to stay on track with the plan to push into Rahaf, which is set to dash hopes that a truce with Hamas may be struck. Ukraine has also increased attacks on Russian oil refineries at the weekend, with the last drone strike causing a fire at the Syzran refinery. This is part of a military strategy to seek out weaknesses in ‘Russia’s war machine’ just as Putin cements his control of Russia in his landslide election victory, where no credible opposition candidates were allowed to stand. On the demand side, the International Energy Agency has said short term demand for energy is likely to be boosted by increased demands for fuel from shipping companies having to re-route vessels away from the Red Sea.
Hopes have risen for a more sustained recovery in China, after industrial production and retail sales beat expectations, pointing to more robust demand from companies and consumers. Retail sales increased 5.5% year on year in the first two months of the year, the 13th month in a row there has been growth in the sector. Industrial output also beat forecasts in January and February, growing 7% compared to the year earlier, and accelerating from December’s growth snapshot. Factories are churning out more goods, particularly textiles and electronics and mining activity also ticked up markedly.
The Fed on Wednesday is expected to hold interest rates at current levels for the fifth meeting in a row, as inflation is still wafting down with the last readings hotter than expected, while the labour market remains super-resilient. Market expectations have now come closer to the Fed’s forecasts, laid out on its famous dot plot, with hopes for a flurry of earlier rate cuts having dissipated. The chart of expectations will be closely scrutinised for any more conservative tweaks, which could spark negative sentiment. Wall Street closed down for the second session in a row on Friday, and trading looks set to be subdued as investors wait to gauge the attitudes of central bankers.
The UK economy appears to have turned a corner, escaping recession, but strong wage growth remains a worry, which is why the Bank of England is also expected to keep the pause button firmly pressed. Cuts starting in the summer, are being priced in by the markets, with August considered to be a bit more probable than June. So, more patience is needed for consumers and companies struggling with high borrowing costs.
There’s a chance the era of negative interest rates could come to an end in Japan this week. Aimed a conquering deflation, ultra-loose monetary policy has been in place since 2016 and the Bank of Japan has been ultra-cautious about shifting stance, even though core inflation has been running at 2% over the year. But now that Japan’s biggest companies, through a negotiated deal with the largest industrial union, have agreed to raise wages by 5.28%, speculation has mounted that the Bank of Japan will make a move on Tuesday and hike rates, for the first time since 2007. However, given its highly risk-averse approach towards the economy, there’s a chance the Bank will hang on for more supportive data and keep the -0.1% rate in place for yet another month.
Its two suitors may have walked away, but Currys has started the week with its head a bit higher, by raising its profit forecasts for the year. Shares slid on Friday after the news that JD.Com was joining Elliott Investment Management in backing out of potential takeovers and they made up a small bit of ground in early trading.
The board was steadfast in its view that the offers priced the company too low, given that it’s partly the current economic climate which is to blame for its lacklustre performance. Today’s figures give a little more weight to their opinion, with the retailer upping pre-tax profit forecasts to at least £115m, up from the previous range of £105-115m, but there is clearly more work to be done.
Consumer electronics has been a challenging place to be, with shoppers’ spending power under pressure, but with inflation set to fall and interest rate cuts eyed on the horizon, there are hopes that these headwinds are subsiding, amid some signs of ‘encouraging momentum’. There are also bright spots emerging for the group’s services channels which have the potential to make customers more sticky, with chief executive Alex Baldock underlining that the group was selling more solutions and services that boost margins.
However, recovery will also depend on a turnaround in operations in the Nordics and although the group says that here too there has been good progress made, the company needs to stay highly focused to keep that on track.’’
