- UK retail sales contracted more than expected in August
- Pound falls to 37-year low
- Fears of a global recession are growing
A bearish session in New York overnight, in which the S&P500 closed down more than 1.1 percent, has led to a dovish open in Europe. The FTSE100 was down just 0.5 percent after first hour of trading with the FTSE250 by a similar margin after even more disappointing economic data, this time around retail sales in August. On the Channel, sentiment was even worse with the DAX down 1.8 percent and the CAC down 1.4 percent.
Economic storm clouds threaten the UK, the latest warning signs are a 1.6 percent drop in the amount of goods bought in the month of August, a sign of growing consumer confidence problems, the pound has resumed its March down, fell to 37 year low against the dollar this morning. Meanwhile, government bond yields remain elevated, possibly creating problems for new Foreign Minister Kwasi Kwateng’s plans for fiscal easing when he announces a mini-budget, scheduled for next week.
In the retail world, it just seems like shoppers are reacting to higher prices by buying less stuff, something noted by Ocado Retail earlier this week.
Meanwhile, a warning came for UK equity investors today as RBC Wealth Management downgraded UK equities due to poor prospects. He said the government’s growth plans and huge government spending commitments won’t boost the stock market, even though current conditions contribute to weak valuations across the board. The Canadian bank is in the process of buying the wealth manager Brewer’s Dolphin (BRW).
“Given the challenges ahead, we think it is prudent to take some gains on UK equities, which have outperformed year to date in local currency terms,” said Frédérique Carrier, chief investment strategist at the British Isles and Asia at RBC Wealth Management. She said the Truss government’s strategy of deregulation and low taxes “can help” growth, although she noted that the UK already had the lowest tax rate in the G7, and said the free trade agreement’s requirements they could stop a further reduction in bureaucracy.
The energy package offers short-term gains (such as helping the most vulnerable people stay afloat through the winter), but could “choke future growth” by contributing to further interest rate hikes.
Meanwhile, inflation fears were stoked today by the World Bank, which said global inflation could hover around 5 percent over the next year and any further economic shock could push the fragile global economy into recession. It is widely accepted that interest rate tightening, something that markets have spewed several times this year, is the key lever to push back inflation and that global rates would need to rise another two percent next year to curb inflation, but warned that such an increase would reduce global GDP growth to a weak 0.5 percent.
How bad will a recession be in the UK?
Can Higher Interest Rates Curb Inflation?
Can Trussonomics avoid a UK recession?
Wondering how to protect your investments? Read this week’s in-depth article by Philip Ryland on how to build an all-weather bag.