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16:45 Wed 05 Oct 2022
Liz Truss has failed to calm UK investors after her address at the Conservative party conference in Birmingham, where she doubled down on promises that her policies will lead to growth
Liz Truss has failed to calm UK investors after her address at the Conservative party conference in Birmingham, where she doubled down on promises that her policies will lead to growth and claimed that the “disruption” caused will be worth it.
Instead, the FTSE lost 0.5% at the close to finish at 7,053 points.
That said, OPEC’s move to lop off a slab of daily oil output has resulted in a rally for crude prices, says Chris Beauchamp, chief market analyst at online trading platform IG.
“Equities are eating into the gains of the past two sessions, with OPEC’s decision to go for a big cut in output has not helped the buyers to keep control,” Beauchamp wrote. “The prospect of two million barrels of daily oil output being eliminated raises the spectre of inflation again, just as the market began to hope that oil prices at least had calmed down.”
OPEC+ has agreed its 2mln barrel a day production cut to support the oil price, despite US president Biden visiting Saudi Arabia in an effort to persuade them to not to slow down pumping.
Here is the official statement confirming the biggest cut since the pandemic.
FULL STATEMENT: The OPEC+ communiqué.
The group cuts output by 2m b/d from the August required output levels; extends cooperation deal with Russia until end of 2023. The group justifies its decision due to “uncertainty that surrounds the global economic and oil market outlook” pic.twitter.com/3JjMUcOk9W
The move is likely to help Russia as it faces a European Union oil embargo following the invasion of Ukraine.
Oil prices are heading higher, with Brent crude now up 1.18% at US$92.88 and West Texas Intermediate adding 1.04% to US$87.42.
Leading shares are off their worst levels heading into the close, but still firmly in the red.
The FTSE 100 is down 62.06 points or 0.88% at 7024.4 having traded in a near 110 point range during the day.
Supermarkets are among the fallers after Tesco PLC (LSE:TSCO), down 4%, said it expected full year profits to be at the lower end of its target range.
If Tesco is facing problems as its customers suffer the cost of living crisis, then investors believe others must be too. So Ocado Group PLC (LSE:OCDO) has fallen 8.48% and J Sainsbury PLC (LSE:SBRY) is off 4.68%.
Still in the retail sector Next PLC (LSE:NXT) is down 6.3% at 4713p after analysts at Deutsche Bank cut their price target from 6200p to 5700p with a hold recommendation.
In the wake of last week’s results , they said: “It has been a number of years since Next management have taken such a cautious view on the outlook for their business for the outer year and this time round there was little reference to the actual consumer outlook. The sales expectations for the remainder of 2H were trimmed by -3% to give -2% full price sales. This feeds through into a small c.2% PBT downgrade to £840m (from £860m).
“However, this is not the main news. The main callout was the potential impact of FX in 2023 and the wider impact on maintaining elevated levels of inflation for the consumer. We have called out the higher prices required for clothing retailers to maintain % EBIT margin and Next suggested that this is unlikely to be achieved in 2023 which puts pressure on gross margin.”
But news that OPEC+ plans to cut output by 2mln barrels a day has helped lift Shell PLC (LSE:SHEL, NYSE:SHEL) by 0.96% and BP PLC (LSE:BP.) by 0.67%.
UK prime minister Liz Truss talked up defence spending in her conference speech, which has seen BAE Systems PLC (LSE:BA.) add 0.59%.
The US service sector slipped back in September compared to the previous month but it was still slightly better than expectations, according to the Institute for Supply Management.
???????? *US SEPTEMBER ISM SERVICES GAUGE FALLS TO 56.7 VS 56.9; EST. 56
*US SEPTEMBER ISM SERVICES EMPLOYMENT INDEX AT 53 AFTER 50.2
*US ISM SERVICES ORDERS INDEX FALLS TO 60.6 FROM 61.8
*US SEPTEMBER ISM SERVICES PRICES-PAID INDEX AT 68.7 AFTER 71.5
In the US, after two days of solid gains, the tides have turned with stocks falling firmly back into the red in part fueled by stronger-than-expected jobs data.
ADP private sector payrolls rose by 208,000 in September, up from an upwardly revised 185,000 in August and above the consensus analyst expectation of 200,000.
Forex.com market analyst Fiona Cincotta noted, while weak data earlier in the week fueled expectations that the Fed could consider a less hawkish stance, the market appears to have come to its senses.
“With inflation still over four times the Fed’s 2% target and the jobs market still strong, any dovish pivot is likely still a long way off,” Cincotta said.
Just after the market opened, the Dow Jones Industrial Average had slid 267 points or 0.9% at 30,049 points, the S&P 500 had dropped 36 points or 1% at 3,754 points, and the Nasdaq Composite had shed 115 points or 1% at 11,064 points.
Twitter Inc (NYSE:TWTR) (Twitter Inc (NYSE:TWTR)), which soared 22% yesterday on the news that Tesla Inc (NASDAQ:TSLA) (Tesla Inc (NASDAQ:TSLA)) CEO Elon Musk will go ahead with his $44 billion purchase of the social media platform after all, was down about 2.3% at $50.70 per share.
Back in the UK the FTSE 100 is currently well off its lows, down 35.51 points or 0.5% at 7050.95, having earlier fallen as low as 6977.
But the pound continues to slide, down 1.3149% at US$1.1299, well below the level it was at before Liz Truss started speaking, as markets continue to wait for news of how the UK government’s proposed tax cuts will be funded.
A 2mln barrel a day cut in OPEC+ output – which is to be discussed by ministers before a final decision – may not be as straightforward as it seems.
According to Bloomberg, several countries are already producing less oil that their quotas, so they would be in compliance with the new limits without actually having to cut current output.
In reality the move would only deliver a real cut of 880,000 barrels a day, according to Bloomberg calculations based on September output figures.
A look at what #OPEC+ quota cuts would mean in practice. A reduction of 2m b/d would remove just 880,000 b/d from the market (and have no impact on Russia), according to Bloomberg’s calculations, given the extent of members’ supply problems. H/T @JLeeEnergy. pic.twitter.com/PxUVcjk481
Oil prices are heading higher on news that OPEC+ is recommending a 2mln barrel a day cut in output.
The move, an attempt to support the price amid fears an economic slowdown would hit demand, is to be authorised by the full ministerial meeting.
It is more than the originally expected 1mln barrel cut although speculation of a bigger move had been growing in the last couple of days.
BREAKING: OPEC+ Panel Recommends 2M B/D Cut to Output Limit | #OOTT
Brent crude, down marginally earlier, is now up 0.73% at US$92.47 a barrel while West Texas Intermediate has added 0.62% to US$87.06.
Back in the UK, and there are more concerns about the mortgage market.
Sky’s Ed Conway points out the rise in the mortgage burden:
You’ll have seen a lot of charts in the past few weeks.
But this one REALLY matters.
The mortgage burden – the % we spend on our repayments – is heading for the highest level since the late 80s.
Last time it hit these levels it preceded the biggest housing crash in modern history pic.twitter.com/6gVHXpXxi0
The US jobs market was slightly stronger than expected in September, according to the latest report from payroll provider ADP.
Businesses created 208,000 jobs, compared to an estimate of 200,000, as schools reopened and pandemic concerns receded.
But ADP said jobs growth still remained below the recent three month average.
*Revision* US ADP Employment Change Sep: 208K (est 200K; prev 132K; prevR 185K)
A strong jobs market is likely to make the US Federal Reserve more hawkish about interest rate rises, but the key non-farm payroll numbers on Friday will give further clues as to the state of the US employment market.
Meanwhile the latest US trade balance came in more or less in line with forecasts and showed a fall on the previous month.
US Trade Balance Aug: -$67.4B (est -$67.7B; prev -$70.7B)
As well as the pound dipping during the prime minister’s speech, bond yields edged up too, said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown:
She said: ‘’As Prime Minister Liz Truss took to the stage to try and shore up her support among her party and the country, the pound fell further back and government borrowing costs rose slightly.
“She may have hoped that her triple promise of growth would have calmed markets further but with nothing new to offer the table, her words have not had the desired effect so far. The pound dipped below $1.14, hovering around $1.135 and 10 year gilt yields lifted a little to whisker under 4%.
“Liz Truss bounded to the stage to the lyrics of M People, hoping the title would provide an aura of optimism to her speech. But the words I’m moving on up, you’re moving on out, may not strike the right note for those homeowners worrying about renewing their fixed rate mortgages, given how so many cheap deals have been pulled over the past week.
“For now she’s pledged commitment to her Chancellor, and has reiterated support for the independence of the Bank of England, but there was no mention of exactly when the independent forecast of her administration’s slash and spend policies would be made public The report from the Office of Budget Responsibility was expected to be brought forward but question marks still remain over whether this will happen. The speech will do little to quell dissent over worries that public services will bear the brunt of the tax cuts plans. Ms Truss will still face an uphill struggle though to convince colleagues and voters that reductions in public spending, which will be necessary to fund tax cuts, won’t end up denting productivity over the longer term instead, especially if working families are made poorer.
“The Prime Minister doubled down on her commitment not to bring in a further windfall tax on energy giants profits, despite the boss of Shell appearing to embrace that possibility with his comments yesterday. Ben van Beurden said that he thought taxes on oil and gas companies were inevitable to help the poorest in society. While the boss of Shell, the Labour opposition and green activists appear to be converging on views, Liz Truss seems to be playing to the conference hall of Conservative members rather than reading the wider arena of public opinion. ‘’
Over in the US, stocks are expected to open lower, snapping a two-day rally, as investors consider the economic prospects for the world’s biggest economy amid stubbornly high inflation and rising interest rates.
The gains on Monday and Tuesday follow a dismal third quarter, which saw steep stock market falls and, if anything, underscore the level of volatility at present.
Futures for the Dow Jones Industrial Average were down 0.9% in pre-market trading, while those for the S&P 500 fell 0.9% and contracts for the Nasdaq-100 were 0.8% lower.
“We shouldn’t forget that the big gains, like the ones we saw yesterday, aren’t stable, simply because they are ‘too big to be stable’,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“In fact, a 3% jump in the S&P 500 is almost as disquieting as a 3% fall, because it is sign of high volatility. And high volatility is a characteristic of bear market,” she added.
The Dow Jones Industrial Average rose 2.8% in regular trading hours on Tuesday, while the S&P 500 advanced 3.06%, and the Nasdaq Composite soared 3.34%.
Ozkardeskaya noted that the rally on Tuesday was also partly driven by a short squeeze, as the most-shorted stocks were among the best performers during yesterday’s trading session. A short squeeze happens when investors betting on a stock to fall find that it rises instead, causing investors to bail out to cut their losses, and in turn, pushing the stocks even higher.
Data out yesterday, meanwhile, showed emerging weakness in the labor market, with US job openings dropping sharply in August.
“So, it is possible that the US jobs market cools down in the next few months. It’s yet to be seen how fast the job losses could help tame inflation in the US. We hope, fast enough!,” said Ozkardeskaya.
“Today, the ADP report is expected to print 200,000 new private job additions in the US. A soft figure is what every investor is secretly praying for. If the soft jobs data is what could stop the Fed from battering the world, well, then, soft data is what people want.”
On Friday, focus will be on the crucial non-farm payrolls data.
The Federal Reserve has delivered three 75 basis point interest rate hikes this year and is expected to keep on raising interest rates as it attempts to tackle runaway inflation but its moves are also expected to dampen growth. Investors fear that the US will be stuck in a prolonged recession as a result. They will be hoping that softer labor market data will dissuade rate setters from hiking interest rates aggressively.
Prime minister Liz Truss reaffirmed her commitment to growing the economy, lowering taxes, keeping a grip on the nation’s finances and breaking down barriers to business.
In a conference speech preceded by “Movin’ On Up” and interrupted briefly by Greenpeace protesters wanting to know “who voted for this?”, Truss said: “The scale of the challenge is immense. War in Europe for the first time in a generation. A more uncertain world in the aftermath of Covid. And a global economic crisis.
“That is why in Britain we need to do things differently. Whenever there is change, there is disruption. Not everyone will be in favour. But everyone will benefit from the result – a growing economy and a better future. That is what we have a clear plan to deliver.”
Hitting out at what she called the anti-growth coalition she finished by promising a new Britain for a new era.
Truss lists her political enemies (the “anti-growth coalition”)
Labour
Lib Dems
SNP
Unions
“Vested interests dressed up as think tanks”
Talking heads
Brexit deniers
Extinction rebellion pic.twitter.com/quk6cWDLqd
Markets are pretty unmoved by the whole thing.
The FTSE 100 – down 97 points or 1.37% before the speech – has improved to 7010.26, down 76.20 points or 1.08%.
The pound meanwhile, down 0.544% before, is now off 0.734% at US$1.1365.
A mention of increasing defence spending to 3% of GDP by the end of the decade has seen BAE Systems PLC (LSE:BA.) edge up 0.42%.
But how that squares with overall spending cuts is not clear, especially when Truss repeated promises about health, including only waiting two weeks for a GP appointment.
The FTSE 100 has fallen further, with grocery shares among the losers.
Ocado Group PLC (LSE:OCDO) is down 5.13% and J Sainsbury PLC (LSE:SBRY) 3.82% lower after rival Tesco PLC (LSE:TSCO) said full year profits would be at the lower end of its expected range, thanks to the cost of living crisis and high inflation.
Tesco itself, after an earlier share price increase, has fallen 3.3%
Overall the FTSE 100 is now off 102.90 points or 1.45% at 6983.56.
Despite the disappointing service sector PMI figure, at 50 it was at least higher than the expected fall from 50.9 to 49.2, which would have signalled a contraction.
Joshua Raymond, director at financial brokerage XTB said: “A contraction in services had been expected (meaning a reading below 50). This is by no means a positive economic reading, with services activity firmly at a standstill and this is the weakest service sector reading since February 2021.
“The immediate market reaction was some small gains in the the pound as in reality the market had expected a faster deterioration in services activity. Given that the majority of UK GDP is reliant on UK services activity, we are now starting to see the UK recession become entrenched in UK data sets. Perhaps the most troubling sign was a fall in new orders for the first time in 19 months as economic activity deteriorated due to higher output costs.
“Yet to be frank, investors have their eyes firmly on the OBR’s forecasts against the Truss government’s spending plans so we can confidently say that the market reaction to this reading has been somewhat muted.”
The UK service sector turned in its weakest performance since the February 2021 lockdown in September
The latest S&P Global/CIPS services purchasing managers index came in at 50 – the boundary between growth and contraction – which was down from 50.9 in August.
The report pointed to a loss of momentum for the sector, with an 18-month period of output expansion coming to an end amid falling volumes of incoming new work.
S&P said shrinking client demand was widely attributed to pressure on household budgets from escalating inflation, alongside widespread pessimism about the economic outlook.
Business expectations for the year ahead meanwhile dropped to the lowest since May 2020. Survey respondents said that the energy crisis, global recession concerns and rising interest rates had all weighed on business optimism.
???????? UK services growth stalled in September, as the Business Activity #PMI slid to 50.0 (Aug: 50.9) to signal the weakest sector performance since Feb ’21. Business expectations slid to their lowest since May ’20. Read more: https://t.co/2YLh4zYY7u pic.twitter.com/T7G17Sr0bh
Tim Moore, economics director at S&P Global Market Intelligence, said: “September data highlighted an absence of growth in the UK service sector for the first time in 19 months as the energy crisis continued to hit business and consumer spending.
“Severe pressure on budgets in the wake of rising inflation, alongside deepening worries about the economic outlook, also led to a reversal in new order volumes for the first time since February 2021.
“Employment trends remained positive in September, with staff numbers increasing at a strong pace as service providers adjusted to post-pandemic requirements. However, the pace of job creation has now slowed for three months running amid greater caution about future growth and sporadic reports of hiring freezes.
“Wage pressures due to shortages of candidates to fill vacancies were widely reported by service companies in September, which added to pressure on business expenses from escalating energy costs. The overall rate of input price inflation nonetheless eased slightly to its lowest since December 2021, helped by falling fuel prices and transportation costs.”
With disappointing manufacturing data on Monday, the composite PMI which includes both services and manufacturing came in at 49.1, down from 49.6 the previous month.
This is the lowest reading since January 2021 but it is slightly better than the initial reading of 48.4.
Meanwhile the FTSE 100 continues to fall, and is now down 88.87 or 1.25% at 6997.59
After a “torrid” first half of the year, the UK new car market recorded its second successive month of growth in September.
Registrations rose 4.6% compared to a year ago in what is typically the second biggest month of the year for the sector, according to the latest figures from the Society of Motor Manufacturers and Traders.
But they are still 34.4% down on pre-pandemic levels of 2019 as the industry continues to battle with supply constraints.
With electric vehicles accounting for more than one in five new cars joining UK roads in the month, UK drivers and fleets have now registered more than one million plug-in electric vehicles, a quarter of which in this year alone.
Despite the improvements, the industry is calling for action to shore up consumer confidence as market enters final quarter.
New car market up as plate change September marks one million EV milestonehttps://t.co/ANPcajU9UG pic.twitter.com/GX6x5qAetv
Mike Hawes, SMMT Chief Executive, said: “September has seen Britain’s millionth electric car reach the road – an important milestone in the shift to zero emission mobility. Battery electric vehicles make up but a small fraction of cars on the road, so we need to ensure every lever is pulled to encourage motorists to make the shift if our green goals are to be met.
“The overall market remains weak, however, as supply chain issues continue to constrain model availability. Whilst the industry is working hard to address these issues, the long-term recovery of the market also depends on robust consumer confidence and economic stability.”
Oil prices have eased ahead of the latest OPEC+ decision on production.
The 13 members of OPEC led by Saudi Arabia and 10 partners headed by Russia ( the + bit of the group name) will hold their first in-person meeting since March 2020 at the group’s headquarters in Vienna.
Expectations are that the group could cut output by as much as 2mln barrels a day to help support the price. But after a surge yesterday, Brent crude is down 0.15% at US$91.66 a barrel while West Texas Intermediate, the US benchmark, is 0.17% lower at US$86.37 as investors await news.
Victoria Scholar, head of investment at interactive investor said: “OPEC+ is reportedly mulling an output cut that would amount to as much as 2 million barrels per day at its meeting today as the cartel looks to offset the recent oil market’s decline.
“On the one hand, the United States and other economies which have been fighting inflation and cost-of-living crises are desperate for oil prices to continue their recent declines, hoping the cartel at least sticks to its current output or possibly even pumps more. The United States in particular is keen that oil prices fall to more manageable levels ahead of the US mid-term elections. On the other hands, Saudi Arabia, Russia and other oil exporting countries are trying to steer oil prices in an upward direction to boost their crude revenues and economic growth.
“Oil prices are steady this morning after yesterday’s more than 3% surge as the market anticipates a possible further tightening in supply from OPEC+ today. Brent crude has been trading in a downward trendline since the peak at the start of June but has regained ground off the September low, now trading back above $90 a barrel.
“An increasingly pessimistic view of the outlook for global growth and expectations of a slowdown in China in particular have weighed on oil prices since the summer, prompting OPEC+ to mull a reduction in its supply to catalyse gains for oil once again.”
Leading shares have paused for breath after yesterday’s gains, and despite a surge in US markets and a positive performance in Asia.
Ahead of the speech from prime minister Liz Truss at the Tory party conference and the latest UK service sector report, the FTSE 100 is down 43.47 points or 0.61% at 7042.99.
On Truss, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “She is expected to brush away concerns about market volatility and double down on her promises that her policies will lead to growth.
“She’s facing an uphill struggle though to convince her colleagues that reductions in public spending, which will be necessary to fund tax cuts, won’t end up denting productivity over the longer term instead, especially if working families are made poorer.”
Investors are also cautious about whether the US Federal Reserve may indeed ease off a little on its path of ever higher interest rates to curb inflation. Some recent data, including job openings yesterday, suggested to some analysts that the Fed might not need to be as hawkish as previously thought.
Streeter said: “Investors are clinging onto every shred of evidence which may point in this direction, such as US job vacancy stats which dropped sharply in September. But there is still every chance that the rays of light they are glimpsing will be eclipsed by a fresh determination by policymakers to stay the course on rate rises until inflation is brought down considerably further. Rather than a quick Fed pivot, it’s more likely to be a slow a gradual turn in policy, particularly if the US core inflation rate, remains stubbornly elevated around 6.3% at the temperature check next week.”
Central banks are still generally in rate rise mode, with New Zealand lifting rates to a seven year high, up 50 basis points to 3.5%.
Tesco PLC (LSE:TSCO) is up around 1% even though the supermarket group said profits were likely to be at the lower end of its expected range due to the cost of living crisis and rising costs.
It said: “Despite ongoing challenges in the market, we are able to maintain our profit guidance within our previous range, albeit towards the lower end.
“We therefore expect full year retail adjusted operating profit of between £2.4bn and £2.5bn. Significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve.”
FTSE 100 set to make a weaker start on Wednesday, after strong gains yesterday, with UK Prime Minister Liz Truss set to deliver her keynote conference speech, and oil-producing nations meet to discuss their production strategy.
Spread betting companies are calling London’s blue-chip index down by around 23 points.
US markets enjoyed a second consecutive day of strong gains as weaker than expected US job postings gave investors hope that the Federal Reserve may take its foot of the accelerator with regard to the pace of future interest rate increases.
At the close the Dow Jones Industrial Average had stormed 825 points higher, or 2.8%, to 30,316, the S&P 500 had advanced 113 points, or 3.06%, to 3,791 and the Nasdaq Composite soared 361 points, or 3.34%, to 11,176.
In London, results from Tesco will lead the corporate news agenda.
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