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Dave Gorman, of Team Asset Management, offers this week’s markets review
Wall Street reached new highs this week buoyed by the ceasefire between Israel and Hezbollah. However, European markets continued to falter as their economic outlook looks troubling, with German industrial struggles and French political turmoil adding to investor tension.
The respite in the Middle East has contributed to a fall in oil prices, but traders will be anxiously watching the result of Thursday’s Organisation of Petroleum Exporting Countries meeting. Will they postpone their planned production increase in the wake of current low oil prices?
Turning closer to home, many of us use Direct Line as our insurer, and it was interesting to learn that rival Aviva made a £3.8bn takeover bid for the company, which was considered insufficient by the management team. The offer was at a 60% premium to last week’s share price, but time will tell how this will all play out.
Investors are always trying to gauge how an economy is working and chief among their interest is the health of the consumer.
This week has seen “Black Friday” (the day after Thanksgiving Day) and plenty of data is coming through to keep everyone focused. The term is derived from the concept that businesses operate at a monetary loss or are “in the red” until the day after Thanksgiving, when massive sales finally allow them to turn a profit or put them “in the black”.
According to Adobe, Black Friday sales online rose 10.2% to $10.8bn – the figures for the past two years, 2022 and 2023, were $9.1bn and $9.8bn, respectively. Top-selling merchandise included make up, skincare and healthcare products, as well as Bluetooth speakers and espresso machines. Toy sales rose 622% compared with the October daily average, while jewellery was not far behind at 561%.
During the last decade, it now seems unbelievable that investors would pay governments to borrow their money. This was known as a period of negative interest rates on government debt or paper, and was primarily caused in the aftermath of the global financial crisis of 2007/09 and the outbreak of the Covid-19 pandemic.
These times have now passed, and the question investors are asking is could corporate bonds yield less than government bonds? Conventional wisdom would suggest this should not happen, but the difference in yield between investment grade corporate bonds and UK gilt yields has narrowed towards record low levels.
The UK Office of Budget Responsibility has outlined a serious and thoughtful scenario – should the UK retain its current policies and demographic projections come true, public debt is set to triple from 100% of Gross Domestic Product to 270% within the next 50 years. Annual borrowing is set to increase from £112bn in 2023/24 to £127bn next year. It’s little wonder, then, that government financial indiscipline (and the US, France and others are just as bad) will mean higher government interest financing charges, along with greater support for corporate bonds where management demonstrate financial rectitude.
Sticky inflation, weak fiscal policies, and the oversupply of government bonds does not augur well for the future of UK gilt yields or those of other countries where fiscal indiscipline exists.
Finally, two other main key events to look out for this week.
First, tonight we should hear reports of the Federal Reserve Chairman’s speech (Jay Powell) and what he is saying about the path of interest rates and the health of the economy.
The next marker is on Friday lunchtime, when the US November payroll figure will be released. It may prove the pivotal data point to determine whether the Fed will cut rates at its next meeting on 18 December.
After the US economy revealed October’s shockingly low 12,000-job gain caused by hurricanes and high-profile strikes, the consensus this time is for 180,000 new jobs – a report higher than this could mean no action will be taken on rates until the new year.
