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Santa rally continues after wobble

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 22 December 2023.

| 9 min read

US stocks rebounded in the latter part of the week ahead of Friday data which is expected to show the Federal Reserve’s preferred inflation metric is close to its target. The reason for an unexpected market fall on Wednesday remained a matter of opinion. Some thought it was due to trading in options that were about to expire - but Chicago-based exchange operator CBOE Global Markets said this was not the case. Some investors likely got nervous following strong gains after the US central bank’s “dovish hold” of interest rates earlier this month. US markets now look set to enter the Christmas break with an eight-week consecutive run of gains. The tech-heavy Nasdaq 100, hit a record high on Tuesday and the S&P 500 added 0.6%, approaching an all-time peak.

UK inflation plunged to its lowest rate in more than two years in November, prompting futures investors to take positions indicating the Bank of England will cut interest rates before the middle of 2024. The FTSE 100 also joined in the rally, which started at the end of October following a summer sell off.

Over the week, the blue-chip FTSE 100 index was up 1.6% by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.7% ahead.

Energy

Oil prices started the week on the front foot after recent falls, amid concerns that attacks on commercial ships in the Red Sea could hit oil shipments. BP have paused all shipments of oil through the Red Sea after recent attacks on vessels by Houthi rebels. The oil major blamed the "deteriorating security situation" in the region as Iran-backed Houthis target ships they believe are bound for Israel. Many freight groups are also avoiding the area. AP Møller-Maersk, the world's second-largest container shipping group, said it will reroute some of its vessels around Africa's Cape of Good Hope. Recent disruption has resulted in the US launching an international naval operation to protect ships taking the Red Sea route. Called Operation Prosperity Guardian, the operation also includes the UK, Canada, France, Bahrain, Norway and Spain.

Angola said it was quitting OPEC following a dispute over oil production quotas after 16 years of membership. It follows other exits in recent years by countries including Qatar, Indonesia and Ecuador.

Economics

UK inflation slowed significantly in November – with the consumer price index (CPI) hitting a two-year low. Inflation stood at 3.9% last month, a dramatic fall from the 4.6% recorded in October as price increases slowed in transport, recreation, culture, and food with the biggest downward pressure coming from fuel. However, food-price inflation still stood at an annual rate of 9.2%. A consensus view was for a fall to 4.4%, so the figure was much better than expected. After the data was released, futures markets fully priced in a quarter-point interest rate cut from the Bank of England in May.

The UK faces a risk of a “hard landing” as higher interest rates squeeze consumer spending, according to Daniel Ivascyn, chief investment officer at investment giant Pimco. He said the UK had a “higher probability of more significant economic deterioration” than the US. He argued that this was because it was “a smaller, open economy, with a consumer that’s feeling the brunt of central bank policy far more than their US counterparts”. Mr Ivascyn also said that he had been running larger bets against UK government bonds compared with the US as he expected the economy would face greater strain.

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Bank of Japan Governor Kazuo Ueda decided to keep interest rates in negative territory — where the policy rate has been since 2016. Mr Ueda appeared determined to keep his options open at a press briefing: he said there was little data for his team to assess before they next meet to decide on rates in January – but he didn’t rule out a rate increase either.

South Korea has achieved advanced world levels of income with growth based around the success of its consumer electronics, digital and heavy industry activities. Its economy is performing well.

Geopolitics

Former US President Donald Trump has said that he considers indictments against him "a badge of honour". Mr Trump was speaking at a campaign event in Iowa, shortly after the state of Colorado's Supreme Court voted in favour of removing him from the 2024 presidential ballot. The court ruled 4-3 to remove Mr Trump, citing his involvement in the 6 January insurrection in 2021. The decision does not go into effect until 4 January 2024, coming right up to the deadline for printing the state's presidential primary ballots. That delay could be extended if the Supreme Court takes up the case, which legal experts expect it to do.

Washington and Brussels agreed to a trade truce until after the 2024 US presidential election.

The US indicated it will back a watered-down United Nations Security Council (UNSC) resolution on the Israel Gaza war to call for more humanitarian aid for the region. This followed a week of negotiations and four postponements - but some countries want a stronger text that would include the now-eliminated call for a truce. The UNSC once again delayed a vote on the resolution on Thursday, after the revised draft was discussed behind closed doors for more than an hour by council members.

Russian President Vladimir Putin said he would be prepared to talk to Ukraine, the US and Europe about the future of Ukraine if they wanted to, but that Moscow would defend its national interests. Mr Putin, who sent troops into Ukraine in 2022, has repeatedly said he would be prepared to talk about peace, but Western officials thinks he is waiting for the US presidential election in November before any discussions are likely.

Washington and Brussels agreed to a trade truce until after the 2024 US presidential election. American tariffs on steel and aluminium and the EU's retaliation on goods including motorcycles and whisky will be suspended until the end of March 2025. The tariffs were originally raised by Donald Trump on national security grounds.

In 2024, Western governments, led by the US, need to find compromises over their financial commitments and weapons supply to Ukraine as internal opposition grows to the cost of war.

Company news

US delivery group FedEx cut its full-year revenue guidance and posted quarterly profits that were significantly below analysts' expectations, sending its shares tumbling. The company is widely regarded as a proxy for the US economy and the results indicated that demand from the US Postal Service had dropped.

BP has short-listed interim chief executive Murray Auchincloss and two senior female executives as internal candidates to replace Bernard Looney, Reuters reported. Mr Looney resigned in September for failing to disclose relationships with employees, leaving no clear succession plan in place.

Sportswear giant Nike issued a cautious second-quarter update, with management highlighting a wary consumer and a deteriorating macro-outlook. Revenue just missed consensus expectations, but earnings beat. Weakness in China as well as Europe, the Middle East and Africa drove the sales miss and has resulted in management revising down guidance for the remainder of the year. In contrast, margin prospects look more positive with management announcing a restructuring programme.

Alphabet's Google has agreed to pay $700m and to allow for greater competition in its app store, according to the reported terms of an antitrust settlement with US states and consumers. The figure was disclosed on Monday in a San Francisco federal court. Google will pay $630m into a settlement fund for consumers and $70m into a fund that will be used by US states, the reports said.

Apple faces a US ban of its smartwatches that will take effect on Christmas Day after one of its algorithms breached a patent by Masimo. It’s a $17bn business that’s one of the company’s biggest segments in its home market. The company is trying to make changes to the device.

Superdry shares slumped after the clothing retailer issued a profit warning. A fall in demand for its autumn and winter range was a result of an "abnormally mild autumn" The company's share price dropped to an all-time low, before recovering.

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Santa rally continues after wobble

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