Fed makes bumper rate cut

The S&P 500 surged to a record high close on Thursday, the day after the Federal Reserve cut interest rates by 50 basis points – and indicated more rate cuts were on the horizon. The Dow Jones Industrial Average also registered a record closing high, ending the session above 42,000 for the first time. The bumper cut suggests the US central bank is seeking to pre-empt any weakening of the US economy and labour market after more than a year of holding rates at their highest level since 2001. It is an “insurance” cut, rather than a move in response to weakness in the world’s largest economy.

The FTSE 100 was up 0.2% by mid-session on Friday, with the more UK-focused FTSE 250 trading 0.5% ahead.

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30 October Budget

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Market Movers

Charles Stanley’s Chief Investment Officer Patrick Farrell talks to Erica Whyte about the US Federal Reserve interest rate hike and what it means for markets.

Economics

In a significant shift for the US economy, the Federal Reserve announced a jumbo 50-basis-point interest rate cut, its first reduction since the onset of the Covid-19 pandemic in 2020. In a press conference following the announcement, Chair Jerome Powell said the half-point pace did not represent any new pattern for the central bank but that officials want to keep the economy, and especially the labour market, in good shape. The bumper cut suggests the US central bank is seeking to pre-empt any weakening of the US economy and labour market after more than a year of holding rates at their highest level since 2001. It is an “insurance” cut, rather than a move in response to weakness in the world’s largest economy. “The US economy is in a good place and our decision today is designed to keep it there,” Mr Powell said. “This recalibration of our policy stance will help maintain the strength of the economy and the labour market and will continue to enable further progress on inflation as we begin the process of moving towards a more neutral stance.” Mr Powell wanted to address any concerns that a 50bp cut meant something was amiss in the country’s economy. Nevertheless, presidential candidate Donald Trump said the size of the reduction showed the US economy was either “very bad” or the central bank was “playing politics”. Will equities benefit as interest rates fall?

Indeed, US weekly jobless claims unexpectedly fell last week and the US consumer is still proving to be surprisingly resilient. Retail sales beat Wall Street's consensus forecast in August, rising 0.1% compared with economists’ expectations of a 0.2% fall. However, there has been some pullback in discretionary spending over the last few months, as clearly seen in the stalling luxury-goods sector.

The Bank of England held interest rates at 5%, as widely expected in the City. The voting split among members of the Monetary Policy Committee (MPC) was 8-1. Eight board members chose to hold interest rates at 5%, while one member of the poly-setting committee decided to lower it to 4.75%. The central bank is widely expected to reduce borrowing costs once more at its November meeting.

Ahead of the Bank of England’s interest-rate decision, data showed inflation remained unchanged last month. The Consumer Prices Index, which tracks cost changes across the economy, rose by 2.2% in the year to August. This meant prices are rising a little ahead of the central bank’s target of 2%. However, services inflation remains sticky.

UK consumer confidence fell sharply in September, as people nervously wait on next month’s Budget. The latest GfK Consumer Confidence Index came in at -20, a seven-point slide on August’s reading. Nevertheless, retail sales data was better than expected.

The UK housing market strengthened in September, as prices moved higher – and the number of agreed sales jumped. According to the latest house price index from Rightmove, average new seller asking prices rose 0.8% this month, double the long-term average. Year-on-year, prices rose 1.2%. The national average asking price is now £370,759. The number of agreed sales also jumped 27%, while the number of new sellers increased 14% year-on-year. However, the number of planning permissions granted for new homes in England is at its lowest in a decade, according to figures from the Home Builders Federation. This shows the challenge facing the Labour government in its plan to boost the number of new homes built. The housebuilding association said 53,379 homes were approved in England in the three months to June, the lowest quarterly figure since 2014. Approvals across Great Britain fell 12% in the year to June, while social housing approvals fell 27%.

Economic data from China continued to be downbeat – with the weakness making Beijing's ability to hit its 5% growth target for gross domestic product (GDP) this year a more distant prospect. China's industrial output growth slowed to a five-month low in August, while retail sales and new home prices also missed market estimates and weakened further. China's new home prices fell at the fastest pace in more than nine years in August – with only two of 70 surveyed cities reporting home prices gains both in monthly and annual terms during the month.

German business sentiment deteriorated more than expected in September, according to a survey released by the ZEW Center for European Economic Research. The indicator of economic sentiment fell to 3.6, down from 15.6 in August – and well below expectations for a reading of 17.1. ZEW President Achim Wambach said: "The hope for a swift improvement in the economic situation is visibly fading. In the latest survey, we once again observe a noticeable decline in economic expectations for Germany. The number of optimists and pessimists is now evenly balanced.” ‘Super’ Mario Draghi unveils EU competitiveness plan – but will it work?

Many governments have ambitious investment programmes but need to balance rising debt and interest charges too. They seek more creative ways to use private finance.

Energy

The US oil and gas industry appears to be zeroing in on the Biden administration’s moratorium on new liquefied natural gas (LNG) export permits as the key policy they want changed under the next US president. Chevron chief executive Mike Wirth called on the administration to reverse the pause, arguing the policy was a failure that “elevates politics over progress.” The permit halt, which went into effect earlier this year, will raise energy costs, threaten supplies for America’s European allies and increase emissions by slowing the transition from coal to gas, Mr Wirth said in a speech in Houston, Texas.

Global wind turbine order intake reached new highs in the first half of 2024, with 91.2 gigawatts (GW) of activity, a 23% increase year-over-year, according to energy consultancy Wood Mackenzie. Globally, investment by developers in the first half totalled $42bn, a 3% annual increase. Much of this increase was due to order intake in the second quarter, which exceeded 66GW due, in large part, to demand in China’s northern region.

Geopolitics

On Tuesday, thousands of pagers used by Hezbollah exploded simultaneously, killing 137 people and wounding thousands of others across Lebanon. A day later, 25 people were killed and more than 450 wounded when walkie-talkies exploded, stoking fears that a full-blown war between Hezbollah – which is backed by Iran – and Israel could be imminent. Israeli warplanes carried out dozens of strikes across southern Lebanon late on Thursday, hours after Hassan Nasrallah, Hezbollah’s leader, threatened “tough retribution and just punishment” for the wave of attacks.

Donald Trump was targeted in a second assassination attempt as he played golf. A Secret? Service agent opened fire on the male suspect, who was equipped with an AK-47 rifle with a scope, two backpacks and a GoPro camera. Mr Trump was as few as 300 yards from him at the time.

Ministers should consider banning Chinese electric vehicle (EV) manufacturers from securing government contracts over national security and data privacy concerns, according to the China Strategic Risks Institute (CSRI) and the Coalition on Secure Technology. Suppliers suspected of having ties to China’s military-industrial complex pose a key risk due to the potential for built-in wireless components to be “weaponised”, which could even be used to gridlock British streets, the report noted. Concerns surround Cellular IoT Modules (CIMs), wireless components that are embedded in EVs and act as a gateway for data to flow in either direction. The report said that data generated by Chinese-manufactured EVs operated in the UK could end up in the hands of the Chinese state and used for surveillance purposes.

European Commission President Ursula von der Leyen named her team, which will lead the EU's most powerful institution for the next five years, tailoring it to focus on challenges posed by climate change, the war in Ukraine and the rise of China.

Artificial intelligence (AI)

An AI advisory body at the United Nations (UN) released its final report proposing recommendations to address AI-related risks and gaps in governance. The UN last year created a 39-member advisory body to address issues in the international governance of AI. The recommendations will be discussed during a UN summit held in September. The advisory body called for the establishment of a panel to provide impartial and reliable scientific knowledge about AI and address information asymmetries between AI labs and the rest of the world. You can read the full report here.

The growth of AI will result in a significant supply crunch in the copper market, miner BHP has warned – and all to do with the data centres housing the massive computing power needed for the technology. This means AI will increase demand for the metal, which is essential for the energy transition away from fossil fuels, the miner’s chief financial officer Vandita Pant said. Today, data centres make up less than 1% of copper demand, but that is expected to between 6% and 7% by 2050. “There is a lot of copper in data centres,” Ms Pant said. BHP expects global copper demand will rise to 52.5 million tonnes a year by 2050, up from 30.4 million tonnes in 2021 – a 72% increase.

BlackRock and Microsoft will launch a $30bn mega fund to invest in AI infrastructure, building specialised data centres. The fund will also invest in energy projects, as the massive computing power also requires a lot of energy. The investment vehicle, known as Global AI Infrastructure Investment Partnership, aims to help enhance AI supply chains and energy sourcing, the two companies said.

Companies

BP has put its onshore wind business in the US up for sale, offering ten wind farms across seven states that may be worth more than $2bn. All the wind farms are operating and are connected to the grid, with a total combined capacity of 1.3 gigawatts. Management said the energy group wanted to focus on Lightsource BP, its solar power business, as the main platform for its US renewable operations.

B&Q and Screwfix-owner Kingfisher delivered half-year results in-line with market expectations, with adjusted pre-tax profit dipping half a percentage point to £334m and sales dipping 1.4%. This is a considerable improvement from the 29% fall in comparable profits in the first half of 2023, potentially signalling a nascent recovery in the DIY market. Management also lifted the lower end of full-year profit guidance, boosting its shares to a two-and-a-half year high.

UK clothing retailer Next upgraded annual earnings guidance yet again, with full-year profits now expected to hit almost £1bn after full-price sales “materially exceeded” forecasts. This was the ninth time in a row that Next has upgraded guidance in its market updates. Next expected sales to grow by 6.6% in the full year, with an extra boost from recent acquisitions of FatFace and an additional stake in Reiss.

Pensions, savings and life insurance provider Phoenix reported a 15% increase in adjusted operating profits in the first half of 2024 and management reiterated its medium-term targets for earnings and cash generation. Phoenix also announced it was pulling the disposal of its SunLife division, which sells financial products to the over-50s, just three months after putting it up for sale given "current uncertainty in the protection market".

Online grocer Ocado upgraded its revenue growth guidance for its retail division following a strong third-quarter performance, sending its shares sharply higher. Both customer numbers and the number of orders rose. Ocado Retail, a joint venture between Ocado Group and M&S, is now targeting low double-digit percentage growth in sales over the year to 3 December, from the £2.8bn generated last year. That’s up from earlier guidance for mid-high single-digit growth given in July.

Management at UK defence company Babcock maintained its annual guidance as underlying profit rose in the first five months of its financial year. In an update ahead of the company's annual general meeting the company said trading so far had been "encouraging".

Close Brothers will sell its wealth management division for up to £200m as it tries to build up a war chest to cover costs associated with a regulatory review into unfair car loans. The merchant bank is selling the division to Oaktree Capital Management. The bank noted this would mark “significant progress” towards plans unveiled in March to bolster its finances by around £400m in response to a Financial Conduct Authority (FCA) review into whether customers were overcharged via now-banned discretionary commission arrangements on car loans. Close Brothers’ have fallen sharply since the FCA announced the probe in January. The potential fallout caused Close Brothers to scrap its 2024 dividend and place its 2025 dividend under review in February.

Iconic ship builder Harland & Wolff said it would enter administration this week after failing to find new cash sources. The company, which built the Titanic at its Belfast shipyard, said that it was insolvent and would appoint administrators from Teneo. The process only relates to Harland & Wolff Group Holdings and did not impact the core operational companies within the group, "all of which are expected to continue to trade in the ordinary course of their respective businesses”. As well as Belfast, the company has operations at Appledore in England and Methil and Arnish in Scotland.

A former minister urged the government to closely scrutinise Chinese retailer Shein for possible links to forced working as the company prepares for its London initial public offering (IPO). Liam Byrne, the Labour MP who heads parliament’s business and trade committee, said the UK should introduce new legislation to increase scrutiny of supply chains that may include products made in the Xinjiang region of north-western China. China has detained as many as one million of the Muslim minority Uyghur people in Xinjiang and has allegedly subjected many to forced labour.