Susannah Streeter, chief investment strategist at Wealth Club, examines the weaker mood in markets as falling metals prices drag on mining stocks and investors weigh the implications of higher US interest rate expectations
Susannah Streeter, Chief Investment Strategist, Wealth Club
“The Footsie is on the back foot, slipping in early trade as a broad sell-off in metals dragged mining stocks lower. However, ongoing demand for military contractors after the UK government’s pledge to bolster the defence budget has helped offset losses.
From steel and aluminium to gold and silver, commodity prices have come under fresh pressure as expectations of higher US interest rates have strengthened the dollar, making metals priced in dollars more expensive for overseas buyers. At the same time, a combination of cooling demand and swelling supplies is piling on more pressure. Steel prices have fallen as activity has been sluggish on Chinese construction sites, while at the same time the EU has tightened import restrictions. Aluminium has hit its lowest level in more than four months amid hopes that increased shipments from the Middle East and rising production in Asia will ease supply constraints.
Gold has lost yet more of its lustre, with the precious metal falling out of favour as investors are lured towards higher-yielding assets. Bullion has fallen to around $3,790 an ounce, extending its sharp retreat from the record highs reached earlier this year, as a run of resilient US economic data has cemented expectations that the Federal Reserve still has scope to raise interest rates. Stronger jobs data and stubborn inflation have reinforced the view that rates are likely to stay higher for longer, pushing up Treasury yields and the dollar, while taking some of the shine off gold.
Gold may glitter as a safe haven during periods of heightened uncertainty, but it’s far from immune to volatility. The precious metal tends to bask in demand when nerves are on edge, but its fortunes can quickly tarnish when expectations for interest rates change, which they have recently. Because gold offers no income, it becomes less attractive when bond yields rise, and investors can secure higher returns elsewhere. That’s why investors shouldn’t put all their eggs in a golden basket. Gold can play an important role in a well-balanced portfolio, helping to provide diversification and a degree of protection during periods of market stress, but as these recent moves show, relying too heavily on any single asset can leave investors exposed when sentiment turns.
JD Sports is under pressure after a lacklustre update from Nike, which its fortunes are so closely intertwined with. While Nike’s latest results were broadly in line with expectations, guidance for flat revenues suggests the road back to full fitness won’t be a sprint but more of a marathon. That’s a headache for JD Sports given Nike remains one of its biggest brand partners, and indicates it could be hard yards ahead for sales. While shoppers are still filling supermarket baskets, they appear to be thinking twice before ordering new trainers and sportswear, in an uncertain economic climate.
Associated British Foods has also slipped after a bit of a sour update from its sugar division, with the group warning losses will be deeper than previously expected as higher energy costs linked to the conflict in the Middle East bite into profitability. Primark remains the jewel in the crown and its planned separation from the wider group looks strategically sound given this volatility from the sugar division. It strengthens the argument that the discount fashion chain deserves to stand on its own two feet rather than having its valuation diluted by the more cyclical fortunes of the food and sugar businesses.
There are glimmers of hope today that the UK housing market may finally be finding its footing. Nationwide’s latest figures showed annual house price growth accelerated to 2.2% in June, up from 1.7% in May, as easing mortgage rates helped improve affordability. After data showed homes have been lingering on the market for many months and many sellers are having to accept lower offers, there are early indications that buyers may slowly be venturing back off the sidelines. Investors will want to see stronger reservation rates feeding through to the listed housebuilders’ order books before judging that the sector has turned a corner, but if borrowing costs continue to edge lower amid hopes the Bank of England will be restrained in hiking rates, there could be more light at the end of the tunnel.
However, optimism has been subdued by lingering legal uncertainty, with shares in Taylor Wimpey, Persimmon and Barratt Redrow falling back as investors continue to assess the potential implications of a proposed multi-billion-pound class action against several of the UK’s biggest housebuilders. While the case still requires approval from the Competition Appeal Tribunal and the companies strongly deny wrongdoing, it’s another dark cloud hanging over a sector which was only just beginning to glimpse brighter skies. Given that the certification process alone could take many months, that uncertainty isn’t likely to lift any time soon.
Wall Street also looks set for a more subdued session, with futures pointing to declines for both the S&P 500 and the Nasdaq after yesterday’s strong gains. After the recent rally, investors are catching a breath, with profit-taking looking likely as attention turns back to the outlook for US interest rates. Markets are slipping back into wait-and-see mode ahead of Federal Reserve Chair Kevin Warsh’s appearance on the ECB Forum on Central Banking policy panel in Sintra, Portugal, where investors will be searching for fresh clues about how much further rates may need to rise. Thursday’s closely watched non-farm payrolls report is also looming large. Another robust jobs reading or stronger-than-expected wage growth could reinforce expectations that the US economy is resilient enough to withstand higher borrowing costs, keeping pressure on Treasury yields. With bond markets and equities finely balanced, one stronger-than-expected payrolls report could quickly upset the recent calm.”
