Market news and views from the Managed Portfolio Service investment team.
In brief
- Rare earth minerals become the battle ground between the US and China.
- UK growth expectations pushed up and interest rate cuts on the cards.
- Bitcoin flies through $100,000.
On track
In the 1980s British Rail came out with the slogan “We’re getting there” as part of a TV advertisement campaign. The Labour government may want to use the same slogan after it announced plans to take control of South Western Rail and unveiled its new “plan for change”. However, as shown by Keir Starmer’s mission statements this week, the Labour party haven’t gone far in implementing anything just yet. Fortunately, encouraging news came from the OECD on Wednesday, when it raised growth forecasts for the UK economy. But it also upped inflation expectations to 2.7% for 2025 on the back of the Budget. The faster growth forecast is positive and may provide a boost to UK businesses suffering the impact of National Insurance hikes.
The other encouraging development for smaller companies was related to interest rate cut expectations. The Bank of England governor Andrew Bailey now says he expects four rate cuts next year. This aligns expectations with those for Europe and is well ahead of the US. Yields have hardly moved on the back of this at the longer end of the curve.
The UK is of course in a much better position than its closest neighbour, France. Michel Barnier resigned from his position of Prime Minister on Thursday and is the shortest-serving French PM in modern history. Ultimately, the French economy needs stimulus and support but the divided government is struggling to forge a path to growth. It is difficult to see where France goes from here. Marine Le Pen and the far-right will be celebrating the chaos that’s unfolding and will spy opportunity. The left have called for leadership change. There can be no election until next summer, with an expansionary policy unlikely. We are very cautious over the outlook for France and the core of Europe with this in mind.
Realistically, we need a strong US and Chinese economy to help keep the momentum of recent years, under what is expected to be a period of de-globalisation or individualism. The US is doing its best, while China is beginning its road to growth once again. An interesting development came from Beijing on Tuesday, when it announced a ban on exports of rare minerals to the US. This move countered the US export restrictions of high-tech materials used by the military to China, specifically chips. This has consequences for inflation and the ability to make semiconductors for all types of equipment. The Federal Reserve will be watching developments very closely for any impact it could have on financial stability. This could suggest we are unlikely to see more than a couple of US rate cuts by the mid-year mark.
The US stock market has once again been the winner, as the S&P 500 Index ticked up this week while other equity markets struggled. One area we mentioned last week, Bitcoin, did retain its momentum and shot through $100,000. This happened alongside Trump picking Paul Atkins, a big advocate of digital assets, as the SEC chair.
Although US jobless claims saw a small tick upwards, the rise in job openings as well as more workers quitting is indicative of a labour market that has stabilised after cooling a little over the summer. Something that the employment report released on Friday confirms.
Looking ahead
Next week the focus returns to inflation numbers. The release of US and Chinese inflation data will likely dominate.
Europe will be hoping the ECB will confirm an expected cut, with some possibility of this being 50bps given weakening data and political turmoil.
The OECD has improved growth forecasts for the UK economy this week. - Chris Robinson