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Markets suffer post-holiday hangover

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 5 January 2024.

| 6 min read

The end of 2023 saw markets guided by optimism, but in the new year investors banked some of the gains made in November and December. After the S&P 500’s nine-week winning streak — its longest since 2004 — there was a more cautious start to 2024 in markets. Most major global stock market indices fell, with technology companies and chipmakers giving back some of last year’s gains.

Markets eagerly await a key US jobs report due later on Friday, which the Federal Reserve hopes will shows some sign of a softening in the labour market to help it deliver a ‘soft landing’.

Over the week, the blue-chip FTSE 100 index was 0.63% lower by mid-session on Friday, with the more UK-focused FTSE 250 trading down 2.33%.

The Middle East

Two bombs exploded and killed at least 95 people at a commemoration for a prominent Iranian general – Qassem Soleimani – who was killed in a 2020 US drone strike. Iran has assembled forces and allies against the US and Israel in an arc of countries in the Middle East. It is known as the “ring of fire”.

UK businesses could see their supply chains disrupted once more, as the conflict in the Red Sea and wider Israel-Hamas conflict remain unsettled and unpredictable. High-street retailer Next warned that supplies of its products could be delayed if disruption to shipping in the Red Sea continued, stating" difficulties with access to the Suez Canal, if they continue, are likely to cause some delays to stock deliveries in the early part of the year".

Container rates are also heading higher. Bloomberg Intelligence noted that transpacific rates jumped 56% in a week to $2,769 for a 40-foot container, based on the Drewry Hong Kong-Los Angeles benchmark.

Economics

Minutes from the Federal Reserve’s December meeting suggested US interest rates could remain at restrictive levels “for some time” until a sustainable lower rate of inflation is seen. Policymakers nevertheless acknowledged that rates had probably peaked – and they will begin cutting sometime in 2024. Members of the Federal Open Market Committee (FOMC) noted that there was “clear progress” being made on reducing inflation. The committee gave no indication that interest rate cuts could begin as soon as March, which resulted in traders tempering their optimistic positions on this front. Futures markets now indicate market participants expect the first cut in May, not March as previously seen.

US job openings eased in November to the lowest level since early 2021, and fewer workers voluntarily quit their positions. The number of hires also fell, adding to evidence of cooling labour demand, which will all be welcome news for the Federal Reserve. Non-farm payrolls data is released later on Friday with investors looking for some weakness after the FOMC meeting noted that the labour market was moving into a better balance.

China’s services activity expanded at the fastest rate in five months during December.

The manufacturing downturn in the US eased a little more than expected in December, according to the Institute for Supply Management's purchasing managers' index (PMI) released on Wednesday. The manufacturing PMI increased by 0.7 points to 47.4, up from 46.7 in November – its highest reading since September. This was the 14th straight month in negative territory – indicated by any reading below 50 – economists had expected a smaller increase to 47.1.

China’s services activity expanded at the fastest rate in five months during December, as companies showed greater optimism about 2024. The seasonally adjusted headline Caixin services index rose to 52.9 in December from 51.5 in November, with output expanding for the twelfth consecutive month at the fastest pace since July 2023.

Geopolitics

ASML, a Dutch manufacturer of cutting-edge equipment used to manufacture semiconductors, has cancelled shipments to China following pressure from the US government, reports suggested. The group was due to export three chip-making machines to China but had its export licences revoked by the Dutch government before they were shipped. The company is one of the only manufacturers of extreme ultraviolet lithography systems (EUVs), which use lasers to help create the circuits for chips. In October last year, the Biden administration introduced further restrictions to try to block non-US companies exporting semiconductor chips and lithography machines that contain US-made parts and technology.

The Centre for Economics and Business Research has produced its annual update on trends in 190 economies around the world. Asia comes out well from long-range forecasts.

Company news

Sportswear retailer JD Sports issued a profit warning, blaming a cut in spending by consumers and a milder autumn than usual. This had forced more promotional activity, hitting margins. As a result of the weaker trading in the 22 weeks to the end of December, JD Sports said it now expected pre-tax adjusted profits of £915m-£935m in the 12 months to 3 February, down from previous guidance of £1.04bn.

High-street stalwart Next raised its guidance for the year to 31 January for the fifth time in eight months. Full-price sales during the months of November and December were better than expected, resulting in lower levels of discounting. In a trading update covering the nine weeks to 30 December, Next increased its annual profit guidance by £20m to £905m, up 4% versus last year. However, the retailer warned that supplies of its products could be delayed if disruption to shipping in the Red Sea continued. "Difficulties with access to the Suez Canal, if they continue, are likely to cause some delays to stock deliveries in the early part of the year", the company said.

BAE Systems is to restart manufacturing M777 Howitzer parts for the US Army, with its performance in Ukraine resulting in increased demand for the weapon.

Discount German grocers Aldi and Lidl reported record Christmas sales as shoppers looked for value amid the cost-of-living crisis. Aldi said sales lifted 8% year-on-year in the four weeks to 24 December. Larger rivals Tesco and J (J?) Sainsbury will reveal their sales performance on 11 January and 10 January respectively.

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Markets suffer post-holiday hangover

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