Market report: Wary mood spreads on geo-political risk and high interest rates
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “A wary mood is spreading as the Middle East crisis looks increasingly intractable, while a high-interest rate environment looks set to stay for longer. President Biden has left Israel, having extracted a promise of aid for Gaza, but there are little signs of an easing in high tensions. Other diplomatic efforts will be closely watched, with the UK’s Prime Minister visiting Israel, and the foreign secretary meeting leaders in neighbouring countries, but a resolution still looks very difficult to achieve and concerns remain about the conflict potentially widening. Oil prices have dipped back after shooting higher yesterday but Brent is still trading above $90 dollars a barrel as supply concerns continue to swirl amid the Middle East turmoil.
Investors are still heading for safe haven assets, like gold and the dollar, nervous about fresh volatility ahead. Amid a fresh sell-off in equities, gold prices are hovering around levels not seen since July, after jumping up over fears of an escalation of the Israel-Hamas conflict. The dollar has strengthened again as investors search for a place of relative safety to preserve their money. Risk-off sentiment has been rising, partly due to fresh data in the US indicating that the economy is still resilient adding to expectations that high interest rates will stick around for longer. The bout of wishful thinking that cuts could be on the horizon is dissipating fast, and investors are settling in for a longer period of elevated rates. The latest snapshot of the new homes market, showing a sharp rebound in building, appears to have caused this latest round of nervousness, given that hikes so far haven’t yet dampened down demand. It comes after buoyant retail sales figures earlier in the week, indicating shoppers were still splashing the cash, which has the potential to keep prices higher.
All eyes will be on Fed Chair Jerome Powell later when he gives a highly anticipated speech to the Economic Club of New York, which it’s hoped will shed more light on the direction of monetary policy. Investors are desperate for a bit more clarity on how policymakers view the landscape ahead and want clues on how long they’ve had to wait before cuts are on the cards. He’s expected to stay in a watchful mood, stressing continued vigilance and not becoming complacent when it comes to inflation.
With the outlook so uncertain, investors are staying clear of government debt and demanding more interest to buy in, amid expectations that this era of high rates will stick around. Yields on 10-year and 30-year Treasuries shot up to fresh 16-year highs. Yields on 10-year and 30-year UK gilts have also surged higher as inflation showed signs of being more stubborn than expected. With around a quarter of the UK’s borrowing inflation-linked, it is becoming increasingly painful for the government to service its debts. Bond investors aren’t just reacting to expectations of interest rates staying higher for longer but are nervous about the size of debt piles which have ballooned to pay for spending commitments, and which are increasingly costly to maintain.
There comes a time when shoppers will start to say enough is enough when it comes to price rises and Nestle has woken up to that realisation. Although sales for the nine months to the end of September still rose by 7.8%, they fell short of analysts’ forecasts while real internal growth, a measure of sales volumes, fell by 0.6%. The cost-of-living crisis has been swirling for two years, and now with consumer budgets increasingly battered, its understandable more shoppers are switching to cheaper products. Brand power can only go as far as pennies and pounds allow, and an increasing number of consumers are making the switch. Nestle though is remaining upbeat and given the decline in sales volumes slowed in the third quarter, it’s hoping the trading down tide will turn. The company is now going to deploy a more razor-sharp focus on getting the price right for individual markets. Higher costs are easing, but it doesn’t mean that shoppers will see the cost of essentials dipping any time soon. Nestle’s diversified product range will continue to offer resilience and it’s the underlying reason why the company says its still on track to deliver organic sales growth of 7-8%. Purina PetCare was the largest contributor to growth in terms of product lines. Although shoppers are clearly willing to forgo more expensive cereals and coffee themselves when it comes to feeding furry members of the family, brand loyalty is much stickier.”