Susannah Streeter, Chief Investment Strategist, Wealth Club:
”A release valve has been unscrewed following the Democratic success of the mid-terms, with pent-up concerns about an escalation of the war in the Middle East evaporating.
But sentiment around the AI trade remains fragile, with an expected slowdown in the data centre build-out still acting like a drag on the big tech sector players. Japan’s Nikkei experienced fresh losses, with electronics and semi-conductor stocks among the fallers, but the broader Topix gained ground, with relief about lower energy costs rushing through given how export-dependent Japan is.
A similar picture looks set to play out on Wall Street, with the S&P expected to largely hang on to yesterday’s big rally, while sentiment is expected to sour again around tech, with Nasdaq futures pointing to a negative start to trading.
Oil prices remain sharply lower, amid hopes that Trump will refrain from ordering fresh strikes on Iran and that ongoing negotiations will bear fruit. The Footsie is on the front foot again in early trade, amid hopes that inflationary pressures on global economies will ease if some kind of resolution to the Middle East conflict is found. The tech-lite nature of the index is also added protection, and is drawing interest, as investors look for more defensive assets while AI jitters continue.
Pound strengthens as UK’s reputation for stability returns
Sterling is also enjoying a significant resurgence, with the pound hitting its highest level since the Brexit referendum on a trade-weighted basis. Slightly stronger-than-expected growth, expectations that the Bank of England will raise interest rates today, and signs of a rapprochement with Europe are all helping to bolster the currency. There is a sense that the UK is beginning to be viewed in a more favourable light by international investors, with its reputation for stability starting to regain some lustre. Political and economic difficulties across the Channel, particularly in France, are also providing a stark contrast. And the improving relationship with Europe could offer a further boost to growth further down the line, if it translates into fewer trade frictions and closer economic cooperation.
Bank of England rate hike expected
Nevertheless, inflation worries are still swirling. Energy prices still remain around a third higher than before the conflict began, with geopolitical risk still baked in, given how capricious US policy has been in the past. That’s why financial markets are still pricing in a rate hike today from the Bank of England, with a quarter of a percentage point increase widely expected. Economic growth has been more buoyant than expected, and the latest snapshot of manufacturing activity surprised on the upside. Inflation is running hot, and is set to get steamier, with companies expected to pass on higher costs as higher consumer prices. So despite this latest relief cascading through energy markets, the economic damage of an eight-month conflict in the Middle East has already been done. Policymakers won’t want inflation to become embedded in the economy. So, they are acting now to try and dampen down demand, by making borrowing more expensive, which is set to act as a drag on spending and investment, make employers more reticent about taking on more staff, and keep wage growth in check.
There is, of course, still a chance that the Monetary Policy Committee will press pause once again, given the potential for a fast-moving situation in Iran, but a hike is likely sooner rather than later. Financial markets are still pricing in four rate hikes between now and the end of next year – but with growth already expected to slow, these forecasts do look overblown, and much will depend on the trajectory of the Middle East conflict.
For borrowers faced with the unpalatable task of remortgaging, it’s still a highly tricky call. Some will want the security of a fixed-rate deal to plan household budgets ahead, even though it could mean a significant jump in monthly outgoings.
For savers, a rate hike could see even more attractive deals land in the market, and it’s really worth shopping around. Some easy-access accounts are already paying in the region of 5%, although the very best rates often come with restrictions, with even better offers available if you can lock up your money for a year or more. However, rates may not move significantly higher given that the market has already priced in the likelihood of further hikes.
Next shows resilience in trading update
Next’s trading update is showing it has a well-stocked cupboard of growth drivers, although it’s been a mixed bag of sales across the business. Unseasonably warm weather put a dampener on UK sales in September, as shoppers held back on refreshing Autumn and Winter styles, and growth at home has slowed. Full-price sales in the UK rose just 2% in the quarter, compared with 3.6% in the first half. But Next has a much wider wardrobe of brands to draw on, and its international business is providing a powerful growth engine. Overseas online sales surged by 32.2%, comfortably beating expectations of 20.5%, helping to lift overall product full-price sales by 8.1%.
Its platform has become a significant strength, with a growing stable of wholly owned brands, licences and third-party labels giving shoppers a much broader choice than the Next brand alone. That breadth, combined with its international reach, is helping it find growth beyond the UK high street and cushion the impact of more cautious consumers.
Next is often seen as a bellwether for the British high street, and the slowdown in UK sales suggests shoppers are becoming more selective and keeping a closer eye on their budgets. The warm weather clearly played a part but with bills going up everywhere, it’s not a surprise many are more wary about non-essential spending.
There are some additional costs creeping into its international operation, with new EU tariffs adding to the expense of fulfilling orders from UK stock into Europe. Next already has plenty of stock stored within the EU, which should help soften the blow, but it still expects the new tariffs to add around £5m to costs this year. It will be looking to claw back some of that expense by making changes to how it distributes goods and introducing selective, modest price rises in Europe.
For now, it’s keeping its full-year profit forecast intact at £1.255bn, an increase of 8.4%. The ability to keep its tills ringing despite a more sluggish UK performance underlines the strength of its business model.”
Feature image by Pexels
