UK markets declined this week, with the FTSE 100 Index falling by 1.1% to trade at 9,610 points at the time of writing.
UK economic output unexpectedly shrank in September, dragging down third quarter GDP growth and underscoring the fragile state of the economy ahead of Rachel Reeves’ tax-raising budget this month. GDP contracted by 0.1% in September from the previous month, the Office for National Statistics said on Thursday, undershooting analyst predictions of zero percent growth. The slowdown, which reflected in part a production shutdown at Jaguar Land Rover triggered by a cyber-attack, underscores the economic problems facing the Labour government as it seeks to bolster growth, which it says is a central mission.
Business sentiment was hit by Reeves’ decision to increase payroll taxes by £25 billion in her 2024 Budget, and households and companies are braced for further increases in taxation on November 26th as she looks to fill a fiscal gap as much as £30 billion.
GDP growth for the third quarter slowed to 0.1%, also below expectations, from the 0.3% expansion in the previous three months. The third-quarter figure was the slowest growth rate since the end of 2023 and well below the 0.7% growth recorded in the first quarter of this year. The modest growth reported for the quarter was driven by increases of 0.2% in services and 0.1% in construction, while the production sector fell by 0.5%.
The UK unemployment rate rose to 5% and wage growth slowed in the three months to September, increasing investors’ bets that the Bank of England will cut interest rates next month to boost a lacklustre economy. The unemployment figure from the Office for National Statistics was the highest for a decade outside the pandemic period, and above the 4.9% expected by economists. The rise in the jobless rate followed a long period of weak hiring, with revised tax data showing payroll employment has fallen by 180,000 since Chancellor Rachel Reeves announced higher taxes on employers in last year’s budget. Business groups said the stagnant hiring reflects employers’ fears that they will face fresh tax increases even as the government’s move to strengthen workers’ rights makes hiring riskier.
Keir Starmer and Rachel Reeves have reportedly abandoned their manifesto-busting plan to increase income tax rates, in a dramatic U-turn ahead of the Budget, which sparked a sell-off in the gilt market. The Prime minister and Chancellor terminated earlier proposals to raise the basic and higher income tax rates, according to officials briefed on the move, amid fears it would anger voters and further antagonise mutinous Labour MPs. The move put gilts on track for their worst one day sell-off since investors fretted over the future of the Chancellor in early July. She is now exploring alternative ways to fill the fiscal hole in the public finances.
Commodity markets
In the commodity markets, Brent crude futures traded around $64 per barrel on Friday and are set to end the week little changed, as investors weighed concerns about global oversupply with looming sanctions against Russia’s Lukoil. The US has hit Lukoil with sanctions as part of its efforts to bring the Kremlin to peace talks over Ukraine. The sanctions prohibit transactions with the Russian company after the 21st November.
OPEC said this week that global oil supplies would slightly exceed demand in 2026, in a shift from the group’s earlier projections of a deficit. OPEC said it expected the supply surplus next year because of the wider production increases by OPEC+, a group of producers that includes OPEC members and allies like Russia. The International Energy Agency raised its global oil supply growth forecasts for this year and next in its monthly oil report on Thursday, signalling a bigger surplus in 2026. The US Energy Information Administration also said in its short term energy outlook on Wednesday that US oil production is expected to set a larger record this year than previously forecast. Global oil inventories will grow through 2026 as production increases faster than demand for petroleum fuels, adding pressure on oil prices, the EIA added.
Gold prices traded around $4,140 an ounce on Friday and are set to end the week higher, driven by a softer dollar and uncertainty over a backlog of official data following the US government’s reopening.
Equity markets
US equity futures fell on Friday after the major averages sold off sharply in the previous session, as the boost from the US government reopening was outweighed by lingering concerns about stretched AI valuations and cooling expectations for near-term Federal Reserve rate easing.
In Thursday’s regular trading session, the Dow Jones Industrial Average lost 1.65%, the S&P 500 declined 1.66%, whilst the Nasdaq Composite plunged 2.29%. The Nasdaq had surged more than 50% between early April, when stocks rebounded from a sell-off sparked by President Donald Trump’s tariffs, and late October, as investors bet that artificial intelligence would ignite a sustained period of blockbuster growth in the tech sector.
However, the index has wobbled over the past two weeks as a growing number of investors have drawn comparisons between the powerful rise in artificial intelligence stocks and the ill-fated technology boom at the turn of the millennium. Thursday’s slide in equities was also accompanied by a drop in the US government bond market, sparked by falling odds that the Federal Reserve will cut interest rates in December, after two quarter-point reductions in recent months. Shares in rapidly growing companies such as technology stocks are seen as particularly vulnerable to shifts in interest rate expectations.
The longest federal government shutdown in US history ended this week after President Donald Trump signed into law a new funding package following a narrow vote in the House of Representatives.
Late on Wednesday, the Republican-controlled House voted 222 to 209 in favour of a bill to reopen the federal government and keep it funded until the end of January. The legislation had passed in the Senate on Monday. The bill was immediately sent to the President’s desk for approval, ending a 43-day impasse that saw thousands of federal workers furloughed, disrupted welfare programmes and chaos at airports as flights were cancelled and delayed.
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