December 2023 Investment & Economic Update

The FTSE 100 index of leading UK company shares closed at the end of November at 7,453.75 points, up 132.03 points or 1.80% during the month.

European markets, including the FTSE, witnessed gains at the beginning of the month, continuing the upward trend that increased the Stoxx 600's market value by $1.2 trillion last month.

The FTSE 100 saw a 0.7% rise in morning trading on Friday, Germany's DAX climbed 0.8%, and Paris's CAC increased by 0.4% during midday trading.

On Friday, Federal Reserve Chairman Jerome Powell pushed back on market expectations for aggressive interest rate cuts ahead. However, his remarks gave some credence to the idea that the Fed at least is done hiking, as the string of rate hikes since March 2022 have cut into economic activity. Markets largely took Powell’s comments as dovish, with stocks up and Treasury yields down sharply.

Additionally, the rise of the FTSE 100 was supported by gains in mining stocks following encouraging manufacturing PMI data from China. A private survey indicated an unexpected expansion in Chinese factory activity in November, driven by increased demand.

Global Demand Concerns

Crude oil prices declined following an unexpected move by a coalition of oil-producing nations led by Saudi Arabia, which refrained from committing to an additional production cut of one million barrels per day.

In anticipation of the Opec+ group meeting, Brent crude — accounting for two-thirds of global oil pricing — had risen 5.1% over three days to over $84 per barrel. The 23 oil-exporting countries' online conference aimed at stabilising the falling oil prices concluded with an agreement to reduce production by at least one million barrels daily by early next year.

Saudi Arabia, playing a pivotal role in Opec+, has been reducing its output by a million barrels daily since summer and plans to continue these cuts. However, Brent crude's price fell post-meeting due to the group's lack of unified commitment to production cuts, showing a 2.47% decrease from the previous day.

Oil prices had already dropped 8% this month before the recent surge, influenced by concerns over global demand next year and the lack of impact from the Israel-Hamas conflict on oil supplies.

The US economy outperformed expectations in the third quarter, growing by 5.2% compared to the earlier forecast of 4.9%, partly driven by increased spending from Joe Biden's administration.

Consumer Spending Growth

Consumer spending also saw growth, albeit at a slower rate of 3.6%, contributing to a rise in stock and bond markets. This upswing is attributed to expectations that the Federal Reserve may soon start reducing interest rates.

The two-year US Treasury bond yield, which inversely correlates with its price, has dropped to a low not seen since July, at 4.66%. Concurrently, Wall Street stocks have also experienced gains.

This economic growth coincides with the implementation of Joe Biden's Inflation Reduction Act, which offers green subsidies to businesses investing in the US, infusing an additional $260 billion in government spending over the next decade.

Money markets have fully anticipated the first US interest rate cut by May, following comments from Fed Governor Christopher Waller, a known hawk, suggesting possible interest rate reductions if inflation continues to decline in the coming months.

In the Eurozone, bond yields have also been decreasing, influenced by lower-than-expected inflation rates in Germany. This has led to a 1% rise in the German DAX stock index, reaching a four-month high.

Modest Price Increase

Last month, UK house prices saw a modest increase of 0.2%, with indications of declining mortgage rates, according to Nationwide. The building society noted that financial markets anticipate interest rates, which are at a 15-year high of 5.25%, have reached their peak and should begin to decrease. This could alleviate some affordability pressures.

However, Nationwide's chief economist cautioned against expecting significant reductions in borrowing costs soon. The Bank of England has raised its base rate to combat inflation and mitigate the cost of living crisis, but this has consequently increased mortgage rates, making home purchases more costly.

Despite the recent rise in prices for three consecutive months, property values in November were still 2% lower than the same period last year. The average price for a UK home is now £258,557, as reported by Nationwide.

It's important to note that Nationwide's data reflects only its own mortgage lending and excludes cash purchases and buy-to-let deals. According to recent official figures, cash buyers represent over a third of housing sales.

The average house price remains approximately £40,000 higher than during the peak of the Covid pandemic, a time when market demand surged as people adapted to new working conditions.

Fiscal Risk Warning

The UK's official economic forecaster has flagged significant fiscal risks in the spending plans outlined in the Chancellor's Autumn Statement.

Richard Hughes, chair of the Office for Budget Responsibility (OBR), expressed to the Treasury Select Committee that these plans are shrouded in "uncertainty," largely because much of the promised spending relies on projected savings rather than existing revenue.

Recently, the OBR revised its UK economic growth forecasts downward. In March, it projected GDP growth of 1.8% for 2024 and 2.5% for 2025. However, these figures have been adjusted to a more modest 0.7% in 2024 and 1.4% in 2025.

In his Autumn Statement, Chancellor Jeremy Hunt introduced various fiscal measures, including tax cuts, stricter welfare regulations, and initiatives to boost employment.

Despite these announcements, Hughes highlighted the challenge in evaluating the government's spending credibility, particularly post-March 2025, as the government has not laid out detailed spending plans beyond this date. This lack of clarity adds to the concerns about the government's fiscal approach.

Growth Prospects Dismal

The Governor of the Bank of England, Andrew Bailey, has expressed concerns about the prospects of economic growth in the UK, emphasising that interest rates are unlikely to be reduced in the near future.

Bailey's apprehension stems from the UK economy's diminished growth potential, which he notes is lower than it has been for much of his professional life. This comes in the wake of the government's forecaster significantly reducing its growth predictions for the UK, citing high inflation and interest rates as contributing factors.

Although inflation has recently seen a sharp decline, dropping to 4.6% in the year to October primarily due to reduced energy prices, it remains significantly above the Bank of England's target of 2%. Bailey underscored that further reducing inflation would be a challenging task.

Climate Summit Tensions

At the COP28 climate summit, UN Secretary-General Antonio Guterres called on world leaders to envision a future free from fossil fuels as a crucial step in combating global warming. This statement came in response to the COP28 president, Sultan Ahmed al-Jaber, who suggested the continued use of fossil fuels.

Guterres emphasised the urgency, stating, "We cannot save a burning planet with a fire hose of fossil fuels." He pointed out that achieving the critical 1.5-degree temperature limit is only feasible by completely prohibiting burning fossil fuels rather than just reducing or managing their use with emerging carbon capture technologies.

These contrasting viewpoints highlight a central and contentious issue at this year's UN climate summit in the oil-rich United Arab Emirates.

Adding to the urgency, King Charles III implored world leaders to advance the global climate agenda, citing the dire warnings of scientists and the critical nature of reaching environmental tipping points. He stressed the importance of restoring and respecting nature's economy, which is fundamental to our survival, noting his long-standing commitment to environmental advocacy.

Eurozone Factory Downturn

In November, global manufacturing activity exhibited weakness, influenced by subdued demand. This trend was evident in the eurozone, where factory activity persisted in contraction, and in China, where economic indicators were inconsistent.

Central banks worldwide have implemented aggressive interest rate hikes to tackle high inflation. However, these increases are mostly concluding as the focus shifts towards mitigating economic impacts.

Specifically, in the eurozone, the final manufacturing Purchasing Managers' Index (PMI) from Hamburg Commercial Bank, as compiled by S&P Global, remained below the crucial 50 threshold that distinguishes contraction from expansion. This indicates a widespread downturn in the region's manufacturing sector.

Nevertheless, there was a slight improvement in November, with the PMI rising to 44.2 from October's 43.1, slightly surpassing the preliminary estimate of 43.8.

Additionally, an index measuring output, which contributes to the composite PMI due next Tuesday and is seen as a gauge of economic health, increased to 44.6 from 43.1.

Market Data

£1 buys $1.2645 or €1.15613. Gold is $2,044.55 an ounce, and UK natural gas futures are 108.40p/therm, down from 123.01p/therm at the start of November. The UK 10-year gilt yield is 4.199%, down from 4.559% at the start of November.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

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