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Oil prices plunge

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 8 December 2023.

| 11 min read

The S&P 500 notched up its first three-day losing streak in almost six weeks between Monday and Wednesday, before rebounding. Investors were looking ahead to Friday’s critical US non-farm payrolls report for further clues on the outlook for interest rates in the world’s largest economy. A consensus view is looking for around 180,000 new jobs.

In what is good news for central banks, oil prices continued to plunge on concerns about the demand outlook, as economies slow, particularly in the US and China. The G7 also moved to ban Russian diamond sales to increase the financial pressure on Moscow following the invasion of Ukraine.

Over the week, the blue-chip FTSE 100 index was up 0.3% by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.6% ahead.

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Russia

Leaders of the G7 group of developed nations agreed to impose a direct import ban on Russian diamonds from January 2024, while introducing a tracing system for diamonds during next year. Russian diamonds are one of the last resources not sanctioned by the G7, meaning the profits from selling them can go into the Kremlin's war chest. On Wednesday, G7 leaders decided to "introduce import restrictions on non-industrial diamonds, mined, processed, or produced in Russia, by January 1, 2024, followed by further phased restrictions on the import of Russian diamonds processed in third countries targeting March 1, 2024," the statement said.

Economics

Oil prices fell sharply this week, with Brent crude prices, the global benchmark, on track to fall for a seventh consecutive week. Price fell sharply over the week with the price at around $75.50 a barrel. Investors are concerned that an economic slowdown will hit demand. Even a US government report showing a drop in crude stockpiles failed to arrest the slide.

The Bank of England warned that the risk environment remained "challenging", with both businesses and households yet to feel the full impact of higher interest rates. In its latest Financial Stability Report, the central bank said the subdued economic activity and increased geopolitical tensions made for a "challenging" outlook. It said that the full effect of higher interest rates, which are at a 15-year high, "has yet to come through, posing challenges to households, businesses and governments". Many UK homeowners must re-mortgage in the coming months – and are likely to see their payments rise significantly.

UK house prices rose again in November and there are signs that activity in the market is picking up, according to Halifax, the country’s biggest mortgage lender. Prices rose by 0.5% in November, boosted by a shortage of properties, the second monthly increase in a row. Recent figures for mortgage approvals suggested "a slight uptick" in activity among buyers as the cost of home loans eases, Halifax said. However, prices are still lower than a year ago, and the lender said it expected that the market would remain under pressure in 2024.

Activity in the UK construction sector weakened for the third month in a row during November on the back of another sharp drop in residential housebuilding. The S&P Global and Chartered Institute of Procurement & Supply (CIPS) UK construction purchasing managers' index (PMI) fell to 45.5 last month from 45.6 in October. It was also the second-lowest reading since May 2020 and came in below the consensus estimate of an increase to 46.3.

Tesla shares’ year-to-date jump of almost 125% accounts for a disproportionate 5% of the S&P 500’s 19% climb, according to Bloomberg data.

German factory orders unexpectedly slumped in October. Orders fell by 3.7% month-on-month, compared with expectations for a 0.2% increase. The drop in incoming orders over the August-to-October period, a less volatile comparison, was even sharper at 4.6% compared with the prior three-month period.

The yen rose against other currencies amid speculation that the Bank of Japan (BoJ) will ditch the world’s last negative interest-rate regime as soon as this month. Comments from BoJ Governor Kazuo Ueda jolted financial markets after he said the central bank has several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory.

Credit ratings agency Moody's cut its outlook on the Chinese government's debt to “negative” from “stable”. It said the risks associated with China's debt pile were mounting as the country grappled with an economic slowdown and property crisis. Beijing said it was disappointed by the action, calling its economy “resilient”.

China's exports grew for the first time in six months in November, suggesting factories in the world's second-largest economy are attracting buyers through discount pricing to get over a prolonged slump in demand. Exports grew 0.5% annually in November, compared with a 6.4% fall in October and beating a consensus view for a 1.1% fall. Imports fell 0.6%, compared with forecasts for a 3.3% increase and swinging from a 3.0% jump last month.

Geopolitics

Tariffs on electric vehicles traded between the UK and EU will be delayed for three years, the European Commission has proposed. It is a result of warnings from carmakers on both sides of the English Channel that the industry was not ready for the change to post-Brexit trade rules planned to come into force in January. EU member states still need to approve the plan at a meeting next week. the European Commission said the "one-off extension" was needed to support the bloc's car industry, which was still struggling with the impacts of the pandemic, Russia's invasion of Ukraine and competition from US subsidies.

Italy has formally notified China of its withdrawal from Beijing’s ambitious Belt & Road initiative (BRI), a significant trade and infrastructure project, according to press reports. The Italian prime minister, Giorgia Meloni, has long been critical of the project and had expressed her intention to withdraw from the deal, seen by many as an effort by China to buy political influence but having limited benefits for Italy. Italy became the only G7 nation to join the initiative in 2019, irking its EU and US allies. Its agreement is set to expire in March 2024.

The multi-party system, often allied to proportional representation in many European Union countries, creates difficulties after elections. Talks to form a stable coalition government can be fraught.

The European Union (EU) seeks to balance conflicting aims with China. It states it is simultaneously a partner, a competitor – and a systemic rival.

Company news

Tesla shares’ year-to-date jump of almost 125% accounts for a disproportionate 5% of the S&P 500’s 19% climb, according to Bloomberg data. That means a lot is hinging on the trajectory of one of the weaker members of the “magnificent seven” group of mega-cap tech stocks. The other six members of this cohort include Apple, Microsoft, Amazon, Nvidia, Google parent Alphabet and Facebook parent Meta Platforms.

China’s Huawei, Intel and several chip start-ups are among a growing field of “very formidable” competitors to Nvidia, its chief executive Jensen Huang said. China has historically accounted for about 20% of Nvidia sales but US bans on the sale of the company’s chips to the nation are posing a challenge. Mr Huang said Nvidia will deliver a new set of products for the Chinese market that’s in line with the latest trade Washington regulations.

Shares in British American Tobacco fell after the company said it would take a hit of around $31.5bn as it wrote down the value of some US cigarette brands. The shares hit their lowest price since September 2010 and shares in rivals also fell. In the current year, management also reduced its guidance. Revenues are now expected to grow at the low end of the 3-5% guidance range at constant exchange rates. The write down marks the first time a major global tobacco firm has written off the value of its traditional cigarettes business in a major market and emphasised the need for the industry to focus on alternatives.

Shares in Barclays were hit after its largest shareholder announced plans to slash its stake in the bank. Qatar's sovereign wealth fund will sell almost 362 million shares at a slight discount to its market price – about 1.4%. The sale will reduce Qatar's stake in Barclays, which dates back to a £4.0bn investment during the global financial crisis of 2008, from 5.3% to 2.9%, with the sale generating about £510m.

UK grocery sales are expected to top £13bn in December for the first time ever on the back of rising prices and Christmas celebrations, according to market research agency Kantar. The forecast, which may provide a boost for the likes of Tesco and J Sainsbury, comes after sales increased by 6.3% over the four weeks to 26 November to £11.7bn.

UK housebuilder Berkeley Group said it had decided to not invest in any new developments due to the adverse planning and regulatory environment. Instead, management plans to focus on "financial strength" after a rise in profits in the first half. "We anticipate the sales market will remain subdued before inflecting in its normal cyclical manner once there is greater confidence in a downward trajectory for interest rates and economic stability returns," chief executive Rob Perrins said.

Travel giant Tui rallied after management said it expected a 25% rise in operating profit this year after 2023 earnings more than doubled on the back of strong demand. It also announced a potential move of its stock market listing from London to Frankfurt, in what could be another blow to the London Stock Exchange.

Shares in Weir Group gained after management said it was now targeting £60m in absolute savings by 2026, as part of its goal to reach an operating margin of 20% by the same year. Management also confirmed its 2023 guidance remained unchanged, with an expected operating margin of 17%.

Shares in car dealership Vertu Motors fell after it issued a profit warning, citing a "volatile" consumer environment. Management blamed "a material change" in the UK used vehicle market, where there was a "significant" drop in wholesale values in October and November.

Infrastructure contractor Balfour Beatty confirmed it was on track to meet market expectations for the full year. Chief executive Leo Quinn also said that the group plans to launch another share buyback in 2024. The company said its order book at year-end is expected to be "marginally higher" than the £16.4 billion reported at the midway point of 2023. The group predicts that full-year sales will be 5% ahead of last year's £8.9bn, driven by higher business volumes associated with work on HS2 and airport activity in Hong Kong.

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Oil prices plunge

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