Equities rally on inflation hopes

Equity markets rallied after inflation data on both sides of the Atlantic came in weaker than expected and the oil price continued to fall, a move that could further help curb soaring costs for businesses and consumers.

US President Joe Biden claimed a summit meeting with Chinese President Xi Jinping in California brought substantial progress, although he did still refer to the Chinese leader as a “dictator”.

Over the week, the blue-chip FTSE 100 index was up 1.7% by mid-session on Friday, with the more UK-focused FTSE 250 trading 4.1% ahead.

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Ukraine

Almost none of the oil sold by Russia in October was sold at or below the $60 a barrel price cap set by the G7 and its allies last year, according to the Financial Times. The newspaper quoted a senior European official who said the latest data resulted in discussions about toughening up the sanctions which were imposed in response to Russia's invasion of Ukraine. Statistics from Moscow indicate the average price received was more than $80 a barrel over the month.

A Belgian proposal put to the G7 to introduce restrictions on the international trade of diamonds has been attacked by the incoming chair of the international certification scheme for conflict diamonds. Ahmed bin Sulayem said the proposals, aimed at restricting Russian sales of diamonds, did not fully consider the trade from diamond-producing nations in Africa such as Botswana, the Democratic Republic of Congo and South Africa.

Economics

Oil prices fell to the lowest since July after rising inventories in the US and the failure of key technical support levels on Thursday that sparked contract sales from algorithms and a 5% fall in the price of Brent Crude futures. This is the fourth straight week of oil price falls, a move that could help the West’s fight against inflation.

The UK’s annual inflation rate fell sharply to 4.6% in October on the back of cheaper gas and electricity, its lowest level for two years. Marking the steepest single-month decline in the consumer prices index (CPI) since 1992, the fall from 6.7% in September also beat the 4.8% figure expected by economists. The reading is expected to ease fears that the Bank of England will increase interest rates again this year, despite being more than twice its 2% target.

Growth in UK wages eased slightly in the third quarter, as hiring slowed. Annual wage growth in regular earnings excluding bonuses was 7.7%, down from a peak of 7.9% two months earlier. Annual pay growth, which hit a record high of 8.5% in July, slowed to 7.9%. However, pay growth outstripped inflation by the most in two years.

The US CPI was flat month-on-month in October and up 3.2% year-on-year, cooler than markets expected, boosting expectations that the Federal Reserve was done raising interest rates.

US Treasury Secretary Janet Yellen took aim at credit rating agency Moody's after the group cut its outlook on the country’s debt last week. She argued that the US economy was strong, and that the treasury market was both safe and liquid. Moody's lowered their outlook on the US credit rating to “negative” from “stable” blaming large fiscal deficits and a declining debt affordability following the rise in interest rates.

Foreign companies are pulling money out of China at a faster rate than they've been putting it in. China recorded a deficit of $11.8bn in foreign investment in the three months to September – the first time such a deficit has been recorded since records began in 1998. The implication is that these foreign businesses are not reinvesting their profits in China but they're bringing it home.

The European Central Bank cast off its German prudent origins this decade, taking the continent into new territory of creating money and buying bonds on a huge scale.

The European Union is short of money. It would like to spend more to boost growth, help Ukraine and speed its path to ‘net zero’. EU budget struggles and the need for stimulus.

Geopolitics

US President Joe Biden claimed a summit meeting with Chinese President Xi Jinping in California brought substantial progress, including agreements on limiting narcotics trafficking, restoring military lines of communication, and to start talking about the global risks posed by artificial intelligence. However, it was clear that after more than four hours, the meeting had not brought the US and China any closer on the fate of Taiwan, which Mr Xi reportedly told Biden was “the biggest, most potentially dangerous issue in US-China relations”.

Washington is doing everything it can to help strengthen Taiwan's defences against a potential Chinese attack. Taipei’s top security official, Wellington Koo, said that security cooperation between the US and Taiwan covered all aspects. China is expected to launch its third aircraft carrier in around about six months’ time and Beijing continues to build up its military capabilities.

US Representative Mike Gallagher has emerged as one of the most vocal China critics on Capitol Hill, and now wants to curb the flow of American investor money into China. Mr Gallagher wants to change the rules for how asset managers such as BlackRock, Vanguard and others are allowed to invest in China.

The US Senate took the risk of an impending partial government shutdown off the table as it passed a stopgap spending bill and sent it to President Biden to sign into law before a weekend deadline. This was the third standoff in Congress that saw lawmakers bring Washington to the brink of defaulting on its more than $31 trillion in debt this spring and twice within days of a partial shutdown that would have interrupted pay for about four million federal workers. The deadline has been extended to 19 January, just days after the Iowa caucuses signal the start of the 2024 presidential campaign season.

The US will enforce oil sanctions against Iran amid the renewed conflict in the Middle East, a White House Energy adviser told Bloomberg.

Environmental, social and governance

Electric vehicle (EV) sales continue to be strong, despite the difficult economic backdrop. China reported record monthly sales in October despite the end of subsidies, according to a report from market research group Rho Motion, with sales in the country up 29% in the year to date in September. EV sales grew 26% in European markets but a reduction in subsidies weighed on demand. EV sales in North America are up 78% so far this year.

The price paid to generate electricity by offshore wind farms has been raised by 66% as the government tries to entice energy companies to invest in infrastructure. The move followed an auction for offshore wind projects which failed to attract any bids, with companies arguing the price set for electricity generated was too low. As a result, the government has lifted the price it pays from £44 per MWh to £73.

COP 28 will urge a big transfer of money to the emerging world so these nations can invest in clean energy. It looks like it won't be enough.

COP 28 will urge a big transfer of money to the emerging world so these nations can invest in clean energy. It looks like it won't be enough.

The importance of ESG investing.

Company news

Events and conference organiser informer raised its full-year profit and revenue guidance after strong trading in the first ten months of the year. Management now expects operating profits this year will come in at more than £840m, up from its prior guidance of £790m and revenue will be more than £3.15m up from its previous expectation of £3.05bn. Management also said it was increasing its share buyback programme to £1.15bn, which represents an increase of up to £150m.

Burberry warned that the slowdown in luxury demand is having an impact on current trading and could affect full-year sales, as it reported a huge deceleration in sales growth in the first half. The company said that, while it is confident in its medium and long-term targets, it hasn't been immune to the wider challenging market conditions. If the weaker demand continues, the group is unlikely to achieve its previously stated revenue guidance for the current year. There has been a slowdown in US sales industry-wide, with China’s stuttering recovery from Covid-19 also impacting demand.

Mr Kipling owner of Premier Foods raised its full-year profit guidance following a "strong" first-half performance. Premier – which also owns the Ambrosia, Bisto and Batchelors brands, among others – had already said in July that full-year trading profit was set to be at the top end of market expectations after "a very encouraging start to the year".

Engineering group Spirax-Sarco lowered its full-year sales guidance – but said a return to growth was expected to take place in 2024. Management now expects full-year 2023 sales will be 1-2% lower compared to 2022, while adjusted operating profit margins would be "slightly improved" on the 20.2% delivered in the first half.

Smiths Group said growth got off to a slow start this new financial year due to tough comparative??, but reassured investors that it was still on track to hit full-year expectations. Organic revenue growth was 3.5% in the three months ending October, compared with a particularly strong first quarter of last year when growth was 13.2%. Nevertheless, this was the tenth consecutive quarter of growth for Smiths and its performance was in line with the board's forecasts.

Melrose Industries lifted its full-year profit outlook, as it highlighted stronger aftermarket demand and pricing. In an update for the four months to the end of October, Melrose said trading was ahead of expectations, with revenue growth of 18%, and underlying demand higher. In addition, the margin performance was "substantially better" than expected, driven by higher aftermarket demand and pricing, and the successful delivery of operational improvements.

Vodafone shares fell after its interim figures showed the group had lost thousands of customers after rolling out inflation-busting price rises earlier this year. The telecoms company lost 49,000 contract customers in the UK in the first half of the year, which it blamed on price rises that took effect from April. Vodafone also raised broadband and mobile prices in Germany, which resulted in hundreds of thousands of customer losses there. Nevertheless, despite shedding customers, the higher prices helped boost Vodafone’s revenues.

Warren Buffett’s Berkshire Hathaway exited its positions in some long-held US blue chips stocks including General Motors, Johnson & Johnson, Procter & Gamble, Mondelez, UPS, Celanese, and Activision Blizzard. It also reduced its stake in Amazon by 5%.