Market report: Positive start for FTSE 100 but Chinese data disappoints
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The FTSE 100 has edged into positive territory at the start of a week which will be dominated by speculation over interest rates and the policies touted on the UK General Election campaign. Investors are largely shrugging off data from China showing ongoing struggles for the economy. Some of the risk-off sentiment which spread sparked by worries about the far-right gaining legislative power in France has eased off. Although the European Central Bank does not look like it’ll be easily propelled into buying French government debt, hopes have risen slightly that spending pledged by the National Rally party would in practice be curtailed in a hung parliament scenario. 10-year French government bond yields edged up slightly to 3.15% but are significantly down on the level they shot up to a week ago of 3.24%.
In the UK, comments by shadow chancellor Rachel Reeves will also buoy hopes that there could be slightly closer trade ties between the UK and the EU under a Labour administration and less of a focus on regulatory divergence. Such an approach could benefit certain sectors, particularly the chemicals industry while a plan to seek mutual recognition of professional qualifications may help companies in the services sectors like auditors and architectural firms.
Labour says it’s focused on stimulating long-term growth to revive the sluggish economy. To facilitate that, Rachel Reeves has left the door open to tinkering with the fiscal rules, the Labour party has said it will adhere to, which will see debt falling as a percentage of economic output in five years. She has suggested that borrowing rules should distinguish between day-to-day spending and investment, potentially loosening the purse strings to further support and partnerships with the private sector, above and beyond the current manifesto commitments. So far, pledges and promises made in manifestos do not seem to have perturbed the debt markets, with the yield on 10-year and 30-year UK gilts falling back over the past week.
A mixed bag of data in China won’t do much to reassure investors concerned about the highly bumpy nature of the economic recovery. Although there was an upswing in retail sales, partly thanks to the 5-day public holiday in May, the rate of industrial production slowed disappointing. The property slump is also showing no signs of imminent reversal with the latest snapshot from the National Bureau of Statistics showing new home prices fell yet again in May by 4.3%, compared to a year earlier, with 67 cities reporting annual price falls. Beijing is attempting to revive the real estate market, by encouraging local authorities to go on home buying sprees, but this data suggests it’ll just be a sticking plaster for a much deeper wound afflicting property sector. With home values falling, it’ll mean consumers’ wealth perceptions may also take a fresh knock, lead to more bargain hunting behaviour, increasing deflationary pressures in the economy. Given the concerns still swirling around China, the world’s second-largest economy, it’s not surprising that Brent Crude prices have fallen back slightly, as investors reassess the outlook for demand. The benchmark is currently trading just above $82 a barrel. Weakness is also partly due to data showing US sentiment fell to a 7-month low in early June amid worries about inflation and the pressure on personal finances.
All eyes will be on the UK’s latest consumer price reading on Wednesday and there are high hopes that inflation’s recent rollercoaster ride may have finally come to a halt back at target. After a disappointing reading in April, which saw the CPI index frustratingly hover elusively above 2%, disinflationary pressures are expected to have helped push prices down further. The effect of unemployment ticking up to 4.4% in April may have made some workers more cautious in their spending patterns. That certainly showed up in the latest economic growth figures, which showed activity in the retail sectors slowing sharply. May was warm but wet, which may have continued to affect demand. But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count. However, a cut in August is still a very real possibility, but the markets are not fully pricing in a cut until September.’’
