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BoE positive on UK inflation

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 2 February 2024.

| 7 min read

The Bank of England forecast that inflation could ease to its 2% target within a few months, but the US Federal Reserve chair Jerome Powell disappointed markets after he threw cold water over the prospects of a cut in interest rates at the central bank’s next meeting in March.

The S&P 500 hit a new record early in the week but slipped following some disappointing tech earnings. Amazon and Facebook-owner Meta Platforms bucked the trend, gaining after their quarterly numbers.

Over the week, the blue-chip FTSE 100 index was up 0.1% by mid-session on Friday, with the more UK-focused FTSE 250 trading down 0.1%.

The Middle East

Europe will be hit the hardest and face the biggest challenges concerning restricted oil supplies following the recent attacks by the Iran-aligned Houthi, according to Wood and Company analyst Jonathan Lamb. The Houthis have launched waves of exploding drones and missiles at commercial and navy vessels since 19 November, responding to Israel's military operations in Gaza. In response, shipping firms have diverted hundreds of vessels around southern Africa's Cape of Good Hope, a journey that takes 10-14 days longer and is more costly than the passage via the Red Sea and Suez Canal. However, oil prices fell this week after Chinese factory activity contracted for the fourth consecutive month.

Economics

The Bank of England forecast that inflation could ease to its 2% target within a few months – as it held borrowing costs at 5.25% for the fourth time in a row. The central bank dropped language about the potential need for further hikes and did not push back against widespread expectations that it will begin cutting later this year. For the first time since the 2020 Covid-19 pandemic, one Bank policymaker – Swati Dhingra – voted for an immediate cut. However, two members of the Monetary Policy Committee (MPC) backed an increase to 5.5%. The remaining six members voted to keep rates unchanged.

US interest rates were also unchanged following the latest meeting of the US central banks Open Markets Committee. However, comments by Federal Reserve Chair Jay Powell following the meeting hit US equity markets. Chair Jerome Powell acknowledged the dramatic inflation progress seen in recent months, but repeatedly emphasized the need to see “more” data confirming that downward trend. He said that a cut in interest rates at the next meeting in March was not the base case. “I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting,” Mr Powell said.

Trump against Biden means "Drill baby drill".

Germany’s economy contracted in the final quarter of 2023, bringing Europe’s largest economy to the brink of recession. German Gross Domestic Product (GDP) fell by 0.3% in the three months to December, in line with expectations. This followed flat GDP in the second and third quarters of last year, with the third-quarter reading revised up from a 0.1% fall.

Geopolitics

Ahead of the US election later this year, Donald Trump offers ‘no World War Three’ whilst President Joe Biden wrestles with problems caused by too many wars. The US election and foreign policy.

Trump against Biden means "Drill baby drill" fighting the road to ‘net zero’.

Likely US presidential candidates Joe Biden and Donald Trump agree about Russia and China more than they admit.

World trade faces unfriendly fire: a story of two canals

Davos worries about artificial intelligence, war and slowing growth.

Tech roundup

In the tech reporting season it has been clear that being merely “good” is not good enough. Microsoft’s results showed solid growth and beat analysts’ expectations generally, but weak guidance for the coming quarter hit the shares. Advertising growth at Google-owner Alphabet disappointed as did chipmaker Advanced Micro Devices also issued disappointing guidance.

Amazon’s results were welcomed. The online retail and cloud group beat Wall Street expectations significantly in almost all metrics in the final quarter of last year. Strength in retail sales and margins was welcome, but markets welcomed its upbeat assessment of prospects for the first quarter. Facebook-owner Meta Platforms announced its first-ever dividend, sending its shares higher.

Artificial intelligence added sparkle to investments.

Other company news

Losses at banks in the US, Asia and Europe have reignited concerns about weakness in the US commercial property sector. Regional US lender New York Community Bancorp said it had taken large losses on loans tied to commercial property, while Japan’s Aozora Bank and Deutsche Bank warned about the risks from their exposure to US property.

Shell reported lower annual profits due to energy prices falling last year. Profits were $28.2bn in 2023, down from $39.9bn in 2022. The price of gas and electricity, as well as petrol and diesel, first began to climb after the end of Covid-19 lockdowns but surged in March 2022 after Russia invaded Ukraine. The price of Brent crude oil reached nearly $128 a barrel following the invasion but has since fallen to about $80.

Diageo said that operating profits fell by 11% in the six months to December 2023, as US consumers traded down to cheaper spirits due to the cost-of-living squeeze, and Latin American sales fell. Ms Crew said she's not satisfied with the results and there was an overstocking issue in Latin America that should be rectified. Medium-term guidance for organic sales growth of 5-7% was reiterated.

Hikma Pharmaceuticals announced an agreement in principle to address the majority of opioid-related claims filed against it by various US states, local communities and tribal nations. The group committed to pay up to $115m in cash and $35m worth of naloxone donations - an opioid antagonist used to counteract the effects of opioid overdoses.

A Delaware judge struck down the $55bn pay package for Elon Musk at Tesla which had been challenged by a shareholder in the electric-vehicle maker. The ruling means that the board of Tesla will have to come up with a new pay proposal for Mr Musk, five years after he had been granted the largest executive compensation plan in history.

A court in Hong Kong has ordered the liquidation of debt-laden Chinese property giant Evergrande. The company has been the poster child of China's real estate crisis with more than $300bn (£236bn) of debt. It is, however, unclear how far the Hong Kong ruling will hold sway in mainland China. The decision is likely to send further ripples through China's financial markets at a time when authorities are trying to curb a stock market sell-off.

Ferrari reported a record net profit of almost €1.3bn in 2023 – exceeding €1bn for the first time as wealthy drivers splash out on luxury SUVs.

Pets at Home issued a profit warning after a weaker-than-expected performance at its retail business. This was despite continued strong performance in its Vet Group operation.

Superdry shares surged after Norwegian alternative investment fund First Seagull took a 5.3% stake in the fashion brand.

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BoE positive on UK inflation

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