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Markets shrug off general election

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 24 May 2024.

| 9 min read

Rishi Sunak fired the starting gun on a general election that will be held on 4 July, saying "now is the moment for Britain to choose its future". The surprise move is a huge electoral gamble given Labour are ahead by about 20 points in the polls. The market impact of the election is expected to be limited, but NatWest shares were hit after the announcement. The government’s almost 30% stake in the bank is now likely to be put on hold, but had been expected to take place over the summer.

Markets are now starting to accept that interest rates will be “higher for longer” and sticky inflation means an aggressive rate cut cycle just isn’t likely. There were some good results as the earnings seasons concludes, particularly from artificial intelligence chip group and stock-market darling Nvidia.

Over the week, the blue-chip FTSE 100 index was down 1.4% by mid-session on Thursday, with the more UK-focused FTSE 250 trading 0.7% lower.

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Economics

UK inflation fell in April but came in higher than market expectations. This is likely to push further out the chances of an interest-rate cut in the coming months. Consumer Price Inflation (CPI) fell to an annual rate of 2.3% last month, which is just shy of the Bank of England's target of 2%. This is the lowest level in almost three years but ahead of consensus market expectations of 2.1%.

Retail sales fell sharply in April, compounding a revised fall in March. The Office for National Statistics said retail sales volumes fell by 2.3% last month, following a 0.2% decline in March. That was revised down from its previous estimate of 0.0%. The weakness was blamed on poor weather, as heavy, persistent rain kept shoppers at home. In total, non-food store sales volumes fell by 4.1%.

UK interest rates should be cut to 3.5% by the end of next year, the International Monetary Fund (IMF) recommended. Such a move could see the Bank of England cut its key rate by up to seven times from its current level of 5.25%. The IMF's comments came as it upgraded its UK's growth forecast for 2024, but it advised against any further tax cuts. It reiterated its message to Chancellor Jeremy Hunt that he should not have cut national insurance at the last two fiscal events. The fund also warned of a black hole in the public finances, with £30bn of spending cuts or tax rises needed to stabilise the national debt.

Federal Reserve officials indicated a willingness to raise interest rates again if inflation doesn’t cool off further, according to minutes of its latest policy-setting meeting. “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,” the minutes said. Central bank officials expressed dismay about “disappointing” inflation readings, saying the most recent data “pointed to more persistence in inflation in coming months.” Indeed, Goldman Sachs chief executive David Solomon said he does not expect the Federal Reserve will cut interest rates this year. “I think we're set up for stickier inflation," Mr Solomon said.

Geopolitics

UK defence minister Grant Shapps accused China of providing or preparing to provide Russia with lethal aid for use in its war against Ukraine. Mr Shapps said British defence intelligence had evidence that "lethal aid is now, or will be, flowing from China to Russia and into Ukraine, I think it is a significant development". He did not provide evidence to support his assertion. But he said there had been a 64% increase growth in trade between the countries since the start of the Ukraine and "they are covering each other's back".

Iranian oil policy should be unaffected by President's Ebrahim Raisi’s sudden death.

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Israel recalled its ambassadors to Norway and Ireland in protest at their governments’ recognition of a Palestinian state, its foreign minister Israel Katz said. “Israel will not remain silent in the face of those undermining its sovereignty and endangering its security,” according to Mr Katz.

Iranian oil policy should be unaffected by President's Ebrahim Raisi’s sudden death because Supreme Leader Ayatollah Ali Khamenei holds ultimate power. Iran and the outlook for oil prices.

BMW, Jaguar Land Rover and Volkswagen (VW) used parts made by a supplier on a list of firms banned over alleged links to Chinese forced labour, a US congressional report has said. At least 8,000 BMW Mini Cooper cars were imported into the US with components from banned Chinese firm Sichuan Jingweida Technology Group, according to the report by Senate Finance Committee chairman Ron Wyden. Automakers’ self-policing is clearly not doing the job," the Democrat Senator said.

The expansion of the European Economic Community and its transition to the European Union resulted in Russia ‘feeling surrounded’. Moscow now sees Nato as a threat.

Company news

Mining giant BHP will keep its proposal on the structure and value of its latest takeover offer for Anglo American – management will instead allay concerns around execution risks over the coming week. BHP now has until May 29 to make a firm bid or it will be forced to walk away for at least six months under the UK's takeover rules after it was granted a one-week extension on Wednesday.

Activist hedge fund Palliser Capital urged Rio Tinto to shift its primary stock market listing from London to Sydney, a move it argued could increase its share price by as much as 40%. The Financial Times reported that Palliser Capital's chief investment officer James Smith believed Rio’s current dual-listed structure was outdated and hampered the mining conglomerate's ability to pursue all-share takeovers.

The long-awaited turnaround of Marks & Spencer has officially arrived, with the retailer issuing a consensus-beating set of full-year results. Annual revenues and pre-tax profits were significantly ahead of market expectations after market-leading growth in its food business. Food and Clothing & Home grew volume and value share ahead of the market and sales increased across stores and online.

Turbine maker Rolls-Royce said it had made "a strong start to the year", building on its "record" performance in 2023, despite continued industry-wide supply chain challenges. Full-year guidance was left unchanged.

NatWest shares moved lower following reports that plans for a sale the government’s stake in the bank have been put on hold after Prime Minister Rishi Sunak called a general election. The government still owns almost 30% of the bank following its bailout during the financial crisis.

Oil services company Wood Group said it had rejected a third £1.52bn improved takeover proposal from Dubai-based engineering and consulting company Sidara, saying it continued to “significantly undervalue” the group and its prospects.

Nvidia posted a better-than-expected set of first-quarter results. Record sales of artificial intelligence chips sent Nvidia’s revenue soaring 262% year-on-year in the past quarter, beating lofty expectations. Its chief executive Jensen Huang said its blockbuster growth was set to continue this year with the launch of a new line of chips.

Synopsys, which provides software and related services to the semiconductor industry, reported a solid set of second-quarter results. Management commentary suggested strong demand environment for its chip design tools. The company raised its full-year guidance, seeing revenue between $6.09bn to $6.15bn, with the mid-point ahead of consensus expectations for $6.1bn.

National Grid launched a rights issue to raise £6.8bn to fund a £60bn investment in upgrading its networks to cope with the switch to low-carbon energy. Existing shareholders have been asked to provide fresh funds for investment in thousands of miles of cables to connect homes with renewable energy projects in the UK and the US.

London office developer Great Portland Estates launched a fully underwritten 3-for-5 rights issue to raise £350m. Management said this will allow it to take advantage of “attractive new acquisition and development opportunities emerging in central London” and deliver attractive and accretive shareholder returns.

Shares in the UK-based retailer Pets At Home moved lower after the competition watchdog launched a probe of the sector over concerns about high prices and a lack of choice for pet owners.

Wizz Air posted its first annual profit since the Covid-19 pandemic. Management said that rising costs and strained supply chains amid geopolitical instability would persist in the coming year, but efforts to control costs would fuel growth – and it expects a strong summer season.

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Markets shrug off general election

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