MARKETS LOOK TOWARDS RATE CUTS AS CENTRAL BANKS TRY TO TAMP DOWN EXPECTATIONS

MARKETS LOOK TOWARDS RATE CUTS AS CENTRAL BANKS TRY TO TAMP DOWN EXPECTATIONS

This week markets have taken the opportunity to catch their breath. Investors are looking for the inflection point, where it becomes clear that the next step for central banks is to begin cutting rates. Central bankers have naturally spent this week trying to calm expectations that the next move is a step down and most have been sticking to the higher-for-longer scenario. The tension between these two positions means markets remain uncertain and continue to be driven by each day’s news flow.

Elsewhere, the lack of growth in today’s GDP numbers is not great but focussing on each piece of economic data is unlikely to provide much clarity. With economic news remaining mixed, each release is as likely to reinforce existing ideas as it is to provide fresh insight. Some will see this as proof the UK remains resilient, while others will see the steady slide to recession. Markets are likely to remain volatile until a clear picture appears. Meanwhile, corporate news was dominated by the collapse of WeWork, however, as always there were pockets of good news.

UK: GILTS CONTINUE TO RALLY AS MARKETS LOOK TO RATE CUTS

Government bonds extended last week’s rally as investors look for confirmation that central banks will soon begin cutting interest rates. Last week, markets took comfort from the Federal Reserve and Bank of England leaving rates unchanged.

The increase in government bonds has been less dramatic than last week but UK gilts led the way higher after Bank of England chief economist Huw Pill said it is not unreasonable to expect UK rates to start coming down in mid 2024. Meanwhile research company Kantar reported that food inflation fell below 10% for the first time since early 2022.

Central banks are trying to stop investors becoming complacent about the potential for inflation to remain elevated. Many central bank officials, including Bank of England governor Andrew Bailey, have taken the opportunity to say rates need to remain elevated to ensure inflation is controlled. Despite these comments developed equities have mostly added to last week’s gains.

EQUITIES: HIGH STREET RETAILERS SHRUG OFF TOUGH TRADING CONDITIONS

Some of the UK’s leading retailers have defied the slowdown in retail spending to post rising profits. The British Retail Consortium recorded weak sales growth in October as consumers feel the effects of high inflation and borrowing costs.

Despite this Marks & Spencer continued its recent turnaround as strong food sales boosted half year profits. Associated British Foods increased its full year profits as it passed higher costs on to customers of its Primark fashion chain and its food businesses. Meanwhile WH Smith has continued to benefit of the return of travel to pre-Covid levels.

Shares in WH Smith are down slightly over the last year but M&S shares are up 108% and shares in ABF are up 62% helped by M&S resuming its dividend and ABF increasing the size of its share buyback. This compares well to the gain for the retail sector of 28%. However, retailers have expressed caution about the outlook. M&S expects conditions may deteriorate due high borrowing costs and ABF says rising wages will continue to be a factor.

PROPERTY: STEADY PROGRESS FOR IWG AS WEWORK DECLARED BANKRUPT

Flexible office provider WeWork’s dramatic decline has ended in bankruptcy. From launch in 2010 it achieved a valuation of $47bn in 2019 before listing on the Nasdaq in 2021 for a lower valuation of around $10bn. It’s drive for growth meant taking long leases on prestige properties and sub-letting on short-term, flexible leases. This saddled the company with huge debts and it never recovered from the collapse in demand during the Covid pandemic. In contrast, UK-listed rival IWG continues its steady recovery and is now the world’s largest listed provider of flexible office space. It remains on track for its full year profits forecast and said it is looking take on some sites from WeWork.

Meanwhile, updates from house builders produced mixed news. Persimmon reported advance sales are down 26% from last year but Taylor Wimpey provided a more positive update as sales remain in line with last year. The news helped continue to last week’s rally in house builders’ shares as they benefitted from hopes that interest rates may be cut soon.