The price of oil jumped due to fears that conflict in the Middle East is spreading. Several leaders of Hamas were killed in an explosion in Beirut and almost 100 people died in Iran following an explosion at a memorial ceremony for a former army commander. The Israeli government hasn’t commented but the governments of Lebanon and Iran blamed Israel for the attacks. Meanwhile, the US and UK have increased efforts to protect shipping in the Red Sea following more attacks by Houthi rebels in Yemen.
The risk of the war spreading caused the price of oil to rise more than 3% midweek as Brent Crude increased to $79 a barrel. However, this is below its price for most of the last six months and oil analysts expect weak demand to help keep prices down. The outlook for other energy commodities remains subdued. Coal continues to trade at recent low levels despite an increase in demand from Japan and Korea while a warm start to the winter in Europe and the UK means natural gas prices remain at the lower end of their recent range.
- 2024: New Year starts in a more cautious mood as enthusiasm for rate cuts runs out
This week the rally that lifted markets at the end of 2023 ran out of steam. Markets started with a bit of new year hangover and slightly weaker jobs data in the US and accelerating inflation in the Eurozone added to the sense that the pre-Christmas enthusiasm for rate cuts was overdone. The minutes from the December meeting of the Federal Reserve again put the US central bank at odds with recent market sentiment. Many Fed members favour leaving rates high for some time and this clashes with forecasts of the first cut coming as soon as March. But with economic data remaining mixed, like a Rorschach test conducted using spreadsheets, people will see what they want and short-term volatility is to be expected.
Meanwhile, Rishi Sunak gave a strong indication that the UK general election will be held in the autumn. That leaves one more chance for a pre-election giveaway in the March budget. This seem unlikely given his previous refusal to consider tax cuts until the UK economy is growing so time is rapidly running out for the government to show that economic growth is on track or for people to feel the benefit in their disposable income.
- Global: Markets fall as expectations of rate cuts recede
Equity and bond markets have given up some recent gains as trading in 2024 got off to a weak start. Falling US, UK and European government bonds pushed up yields as markets reduced expectation for interest rate cuts this year. In the US, the minutes from the last rate meeting of the Federal Reserve showed many policymakers favour leaving rates high to ensure inflation continues to fall back to target and this undermines the assumption that the first rate cut will be in March. Meanwhile, rising inflation in France and Germany casts doubt on the European Central Bank’s willingness to cut rates.
Economic data from the US shows the jobs market continuing to cool. The number of job vacancies has fallen to its lowest in almost three years and the number of people voluntarily leaving their jobs dropped steeply. The more pessimistic outlook caused global equity markets to fall back and the biggest declines were seen in sectors like US technology stocks which gained the most in the end of year rally.
- Retail: Contrasting fortunes for UK High Street trading
The first updates following the key Christmas trading period paint a mixed picture. Next upgraded its forecast for full year profits again as full price sales increased almost 6% compared with last year. It said full year profits are expected to rise to £905m, up from its last forecast of £885m. However, shares in JD Sports fell heavily after it
reported weaker Christmas trading as comparable sales were up almost 2% from last year. This was less than it expected as consumers turned more cautious.
Supermarkets reported a bumper December as grocery sales hit a record £13.7bn. However, the rise in spending was reliant on a big increase in discounts and special offers as sales volumes increased by just 2%. Almost a third of supermarket spending over Christmas was on items on a promotion. The rise in special offers and discounts helped drive down food inflation as Kantar reported grocery inflation slowed from 9.6% in November to 6.7% for the year to the end of December.
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