Market report: Pound falls as US and UK interest rate forecasts change

• Pound falls below $1.25 as BofE governor indicates end to rate hike cycle is in sight.
• Strong US services data raises expectations that the Fed’s interest rate hikes could resume after a pause this month.
• Tech stocks set to be kept under pressure, while Apple is also hit by Chinese government phone ban reports.
• China risks missing growth targets as exports dropped 8.8% in August year-on-year, while imports contracted 7.3%, albeit lower falls than expected.
• Aerospace company Melrose reports guidance ahead of expectations but announces CEO and finance chief will be replaced.

Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The twin worries of China’s slowdown and the prospect of higher interest rates in the US are proving hard to shift, spreading fresh unease among investors. Lacklustre trading is set to be the order of the day given there is so little to pin more optimistic hopes on right now. But there could be a glimmer of light for UK borrowers and domestically focused stocks, after the governor of the Bank of England indicated the interest rate medicine is working, and the end of hikes is in sight.

Comments from Andrew Bailey have sent the pound sharply lower, below $1.25 to a level not seen since June. Speaking to MPs, he said the UK is much nearer now to the top of the cycle. So, not only is the Bank of England forecast to go softer on rate hikes going forward, with this month’s expected increase now potentially the last, the bets are that the Fed might step back on the pedal after a brief pause. This marks a considerable reversal of expectations compared to just a few weeks ago, as data has filtered through showing a sharper weakening of business activity in the UK, while in the US the services sector is still pumping. Americans may be buying less stuff, but they appear to be ringfencing budgets for entertainment and socialising, which risks keeping upwards pressure on prices. Although oil prices have dropped back a little, they remain elevated, with Brent Crude hovering around $90 a barrel, keeping inflationary pressures on. The weaker pound is likely to give more support to multinationals traded in London, given that overseas earnings will be worth more when converted back into pounds, which could help offset concerns about a slowing global economy.

The prospect of yet another rate increase, aimed at quashing demand more across the US economy, is set to keep tech stocks under pressure, amid expectations that higher borrowing costs will squeeze spending and their revenues, further down the line. Apple was one of the biggest fallers on Wall Street, not helped by reports Chinese government officials might be banned from using the company’s products at work. While the ban itself is unlikely to have a dramatic effect on sales, the risk is that these restrictions could spill over into wider public sentiment against the brand. China is a crucial market for Apple, not just because it’s a super-important manufacturing hub, but because the vast country is an increasingly important source of revenues. Already rivals are closing the gap in high-end smart phone sales, and if the situation were to escalate this could potentially allow competitors to have a greater chance of stealing Apple’s crown.

Demand for Chinese goods both inside and outside the vast country declined again, and even though the fall in imports and exports was lower than expected, the data yet again shines the spotlight on the slowing economy. It doesn’t look as though there will be much respite in the coming months without further stimulus to kick start spending. Chinese consumers are cautious, with an eye on the fragile property sector, unwilling to spend big given the uncertainty of where the economy is heading. Orders from overseas also keep sliding, as inflationary pressures weigh heavily on key markets. There is likely to be little respite in falling demand for products made in China given that higher interest rates are set to  linger for longer due to the stubborn effects of inflation.

Melrose is flying into markedly improved conditions and although change at the top can be unsettling, the ready replacements for the CEO and group finance chief will limit turbulence. It’s the end of a long journey for chief executive and co-founder Simon Peckham, who appears to have successfully led the company on its new strategic direction as a pureplay aerospace company, after automotive, hydrogen and metallurgy units were demerged into Dowlais. The company is now trading ahead of expectations, partly thanks to higher-than-expected margins at the firm’s engines division. The outlook for long-term growth appears to be solid, and this run of double-digit growth is set to continue, helped by its diversification with exposure to both military and commercial customers. Chief operating officer Peter Dilnot will take control as CEO, a manoeuvre which should reassure investors, given he’s been guiding recent changes, and a new group finance director, Matthew Gregory is already waiting in the wings to replace Geoffrey Martin. The bright outlook is spurring on a £500 million pound share buyback scheme which is set to start next month.”