UK markets were relatively unchanged this week, with the FTSE 100 Index falling by 0.2% to trade at 7,690 points at the time of writing. The UK Government racked up its biggest monthly surplus on record in January, with the public sector recording a surplus of £16.7 billion, according to the Office for National Statistics.
These latest numbers mean borrowing in the financial year to date is £9.2 billion lower than previously forecast by the Office for Budget Responsibility, thanks to lower than expected debt interest payments and revisions to earlier months’ numbers. The figures provide the Chancellor, Jeremy Hunt with good news, and he should have the budgetary room for a manoeuvre to push through a round of cuts to personal taxes, such as a 1p reduction in income tax in the March 6th budget.
The Government has already announced plans for a package of tax rises that will come into effect after polling day.
The Chancellor introduced £20 billion of tax rises in the 2023-24 financial year, including freezing personal tax thresholds and higher corporation tax.
The £17 billion of pre-announced tax rises will hit home during the next parliament and include continued threshold freezes and a planned stamp duty increase.
UK business activity expanded more than expected in February, fuelling hopes that Britain’s recession could already be over.
The S&P Global flash UK PMI composite output index, a measure of the health of the private sector, rose to 53.3 in February, up from 52.9 in January, according to data released on Thursday. The results pointed to the economy growing at a rate of 0.2-0.3% in the first quarter of 2024, relieving fears that last year’s downturn will have spilled over into 2024 and suggesting the UK’s recession is already over.
Elsewhere UK consumer confidence unexpectedly fell in February, according to research company GfK, suggesting that early optimism for 2024 has abated in the face of persistently high inflation.
Commodity markets
In the commodity markets, Brent crude futures traded around $83 per barrel on Friday, and are set for a weekly rise, after the latest Energy Information Agency report showed a smaller than expected storage build last week.
The oil market may be tightening due to winter storms in North America last month that knocked out 1.4 million barrels per day of global crude production. The weather related disruptions happened at the same time India’s oil demand rose by 8.2% year over year in January. Meanwhile, compliance with OPEC+ production cuts has increased, with exports down about 900,000 barrels in February, the lowest level since August.
In the US, crude stockpiles rose by 3.5 million barrels last week, while total inventory was largely flat, according to the Energy Information Administration.
The geopolitical outlook in the Middle East remains uncertain as the US works towards a ceasefire in Gaza, while tensions are escalating on the Israel-Lebanon border and in the Red Sea. A temporary ceasefire in exchange for releasing hostages in Gaza would potentially reduce the risk of conflict engulfing the Middle East and disrupting crude supplies.
Gold traded around $2,020 an ounce on Friday and is set for a weekly rise, driven by a retreating US dollar and safe haven demand on the back of the Middle East conflict, while investors await further US economic data for insights on interest rate expectations.
Equity markets
US equity futures were slightly negative on Friday, after hitting all-time highs on Thursday, fuelled by artificial intelligence optimism. In Thursday’s regular session, the Dow Jones Industrial Average gained 1.18%, the S&P 500 advanced 2.11%, while the Nasdaq Composite soared 2.96%.
US stocks are back at record highs following better than expected numbers from the semiconductor industry, which boosted technology stocks around the world. The results even overshadowed the release of the minutes from the Federal Reserve’s latest meeting, which reaffirmed that officials were cautious about cutting rates too quickly in January. A wave of excitement about artificial intelligence has also boosted markets beyond the US, with European technology stocks surging in recent months.
Some analysts believe certain stocks and equity indices are beginning to approach bubble territory, with a growing chorus of investors in recent weeks drawing parallels between the current tech led rally in the US and the dot-com era of the late 1990’s. Others have become nervous that global equity markets have reached record highs, despite expectations that economic growth will slow in the year ahead, and as inflation in the US is showing signs of rebounding, meaning that interest rates may not fall as fast as markets had previously hoped.
Federal Reserve Governor, Christopher Waller, said on Thursday that policymakers should delay interest rate cuts by at least another couple of months to see if a recent up tick in inflation signals stalling progress towards price stability, or whether is just a bump in the road. Waller also pushed back on the idea that the US central bank risks sending the economy into a recession if it waits too long to cut rates.
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