UK markets saw modest gains this week, with the FTSE 100 Index rising by 0.15% to trade at 9,735 points at the time of writing.
The UK economy shrank by 0.1% in October, in a slowdown that analysts and the UK statistics agency linked to concerns about Rachel Reeves’ tax-raising Budget. The figures published on Friday compare with a 0.1% expansion forecast by economists polled by Reuters and underscore the challenges facing the country’s Labour government.
The contraction is a blow for the UK chancellor, who has faced sustained criticism from MPs following months of confidence-sapping leaks and speculation ahead of her 26th November Budget. Despite the government insisting that growth is a priority, the economy has grown in just one of the past seven months and remains no larger than it was in May.
The Office for National Statistics also confirmed a 0.1% GDP fall in September, when a cyber-attack triggered a shutdown at Jaguar Land Rover, and said there had been no growth in August. For the overall August to October period, the economy also fell 0.1%, the Office for National Statistics data showed, the first fall on a three-month basis since the end of 2023.
Growth has slowed steadily through the year, down from 0.7% in the first quarter and 0.3% in the second. Even before Friday’s figures were released, markets attributed a high likelihood to a 0.25% interest rate cut to 3.75% by the Bank of England next week, partly because of the country’s sluggish growth.
Investors stuck to those bets after the data was published, giving a cut a 90% probability. Without a material upturn in momentum towards the end of the year, the economy will post a quarterly contraction in Q4 for the first time in two years.
The Office for Budget Responsibility upgraded its UK growth forecast to 1.5% last month, compared with the 1% it had expected in March. However, the fiscal watchdog revised its 2026 growth expectations down by 0.5% to 1.4%.
The Office for Budget Responsibility expects quarterly growth to pick up only gradually in the near term because of continuing geopolitical uncertainty and subdued business and consumer confidence. The Organisation for Economic Co-operation and Development forecasts UK growth of 1.4% this year – the second-fastest in the G7 after the US – before slowing to 1.2% next year, below Canada and the US.
Commodity markets
In the commodity markets, Brent crude futures traded around $61 per barrel on Friday and are set for a weekly fall, as investors shifted focus back to Russia-Ukraine peace talks.
Russian Foreign Minister Sergei Lavrov said on Thursday that a visit to Moscow this week by US envoy Steve Witkoff had resolved misunderstandings between the two countries. He added that Moscow had handed over Russia’s proposals on collective security guarantees to Washington.
The leaders of Britain, France and Germany held a call with President Donald Trump to discuss Washington’s latest peace efforts to end the war in Ukraine, in what they said was a “critical moment” in the process. Ukrainian drones struck an oil rig belonging to Russia in the Caspian Sea for the first time, halting the facility’s extraction of oil and gas.
Meanwhile, the International Energy Agency upgraded its 2026 global oil demand growth forecasts while trimming its supply growth predictions in its latest monthly oil market report on Thursday, implying a slightly narrower surplus next year. Geopolitical tensions also influenced prices earlier in the week, after the US seized a sanctioned Venezuelan tanker off the coast of Venezuela.
Gold prices traded around $4,340 an ounce on Friday to hit its highest level in more than a month, after the US Federal Reserve’s quarter-point rate cut pushed the dollar lower, while silver surged to a record high.
Equity markets
US equity futures were mixed on Friday as investors evaluated a new round of corporate earnings. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 1.34%, the S&P 500 gained 0.21%, whilst the Nasdaq Composite lost 0.25%.
The Federal Reserve cut interest rates to a three-year low this week after a divisive meeting that exposed deep fractures in the central bank over whether to prioritise tackling a weakening jobs market or high inflation. The central bank lowered its benchmark rate by 0.25% on Wednesday to between 3.5% and 3.75% as widely anticipated by financial markets.
This marked the third reduction in borrowing costs in a row. Policymakers noted that downside risks to employment have risen in recent months as the jobless rate increased and hiring slowed, while also indicating that inflation remains somewhat elevated. Three of the 12 voters on the Federal Reserve’s policy-setting board objected to the central bank’s 0.25% cut, the most powerful revolt since 2019.
The debate inside the Federal Reserve comes as President Donald Trump has insisted the central bank should cut rates much more aggressively, while repeatedly criticising chair Jerome Powell. Median forecasts show that officials now expect just one 0.25% rate cut next year, however, three members thought borrowing costs would end 2026 higher than they are now, while one pencilled in six quarter-point cuts.
President Trump began holding interviews this week on who he will nominate to replace Powell when his term expires in May 2026. Kevin Hassett, a Trump ally and the frontrunner for the role, said prior to the Federal Reserve decision that while a quarter-point cut would be a small step in the right direction, the central bank had plenty of room to reduce rates and would probably need to ease policy further to bolster the economy.
The projections released with the Federal Reserve statement show policymakers expect inflation to fall to 2.4% by the end of next year, against a September estimate of 2.6%. The central bank also said on Wednesday that it would resume buying short term treasuries to ease strains in US money markets.
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