FTSE breaks through 8,000 level
Last Week in the City provides a round-up of market movements and the global investing outlook.
This covers the week to 17 February 2023.
By Garry White, Chief Investment Commentator Charles Stanley
The FTSE 100 broke through the 8,000-point level for the first time in its history on Thursday, although it was trading slightly below this level on Friday as disappointing outlooks from retail banks hit the index.
Markets were subdued as traders finally seemed to accept what the Federal Reserve has been saying for some time – that inflation would remain a problem throughout 2023 and a “pivot” to lower rates was unlikely. Despite rising rates, the US economy is proving extremely resilient. There was better news on interest rates for the UK, as economic data suggested that Bank of England action was working, with some market players hoping that no further rate hikes were necessary.
Over the week, the blue-chip FTSE-100 index was 1.2% ahead by mid-session on Friday, with the more UK-focused FTSE 250 up 0.2%.
Ukraine & energy
Russia will cut oil production from next month in response to a price cap imposed by Western nations. The cut of 500,000 barrels a day, which is equivalent to almost 5% of Russia’s production or 0.5% of world supply, was a response to the “destructive energy policy of the countries of the collective West”. It is being viewed by many as another attempt by Vladimir Putin to weaponise oil prices. However, Brent crude oil prices fell slightly over the week – by less than 1% to about $85 a barrel – and demand concerns resurfaced as markets started to accept the Federal Reserve will not “pivot” its policy this year.
China’s leaders said the country has achieved a “decisive victory” over Covid-19 as its death toll dropped sharply. A meeting of the Politburo Standing Committee said the Communist Party’s judgment, policies and adjustment of Covid controls since November have been “totally right.” Its virus data and the true impact of the reopening wave, however, have been called into question. This means China recorded the steepest drop in Covid deaths among more than 20 places hit hardest by the omicron variant, reviving questions about its virus data and the true impact of the reopening wave. After meticulously tracking cases for most of the pandemic, China abruptly abandoned its signature zero-tolerance policy at the end of 2022, halting mass testing, quarantines and lockdowns, and narrowing its definition of what constitutes a Covid death. Four separate academic teams have come up with broadly similar estimates suggesting that one million to 1.5 million people died during the surge, far more than China’s official count.
Markets and economists have caught up with the Federal Reserve’s interest-rate reality. Stubborn inflation in the US has meant the central bank has insisted that rates will remain “higher for longer” but futures markets were still pricing in two US interest rate cuts at the start of February. However, persistently strong economic data has brought markets into line and markets are no longer pricing in a “Fed pivot” to lower rates in 2023.
The U.S. Federal Reserve will raise interest rates at least twice more in coming months, with the risk they go higher still, according to most economists in a Reuters poll, who also see no cut by year-end. Indeed, two Federal Reserve officials – St Louis Fed President James Bullard (voting member) and Cleveland Fed President Loretta Mester (non-voting member) – said the US central bank likely should have lifted interest rates more than it did early this month and warned that additional hikes in borrowing costs were essential.
This followed unexpectedly strong job gains for January and US consumer prices rose briskly. The overall consumer price index climbed 0.5% in January, the most in three months and was bolstered by energy and shelter costs. The measure was up 6.4% from a year earlier, higher than market expectations.
Runaway inflation, uncertainty about interest rates, Covid-19 impact in China, and Russia’s war in Ukraine were the ‘unknown’ factors driving markets over the last 12 months. Investors will be watching keenly for more clarity on these key issues in 2023. UK retail sales unexpectedly rose in January UK inflation fell to a five-month low of 10.1% year-on-year in January, lower than market expectations of 10.3%. The data boosted expectations that the Bank of England could soon stop raising interest rates. Core inflation, which strips out volatile food, energy, alcohol and tobacco prices, fell to 5.8% from 6.3% the previous month. The figure was much lower than the 6.2% forecast by economists.
UK retail sales unexpectedly rose in January, increasing 0.5% month-on-month following a 1.2% decline in December. Economists had been expecting a 0.3% fall. Non-food stores sales rose 0.6% over the month following a 2.5% decline in December 2022. Feedback from retailers suggested that growth was supported by sales promotions, the Office for National Statistics said. However, sales were 2.9% below pre-pandemic levels with volumes 1.4% lower.
Beijing said it will retaliate against the US for blasting its balloon craft out of the sky. Foreign Ministry spokesman Wang Wenbin said the commercial weather balloon had inadvertently floated over the country after being blown off course. China also imposed sanctions on two American defence manufacturers over arms sales to Taiwan, a day after Beijing pledged to take “countermeasures” in response to Washington’s handling of the balloon issue. Following the action against the two US groups, US President Joe Biden said he intended to speak with China’s President Xi Jinping to defuse tensions.
A China-based former employee of Dutch semiconductor equipment maker ASML stole data from a software system that the corporation uses to store technical information about its machinery. This is the second such breach that ASML has linked to China in less than a year.