UK markets pulled back this week, with the FTSE 100 Index falling 0.9% to trade at 9,180 points at the time of writing.
Long-term UK borrowing costs neared their highest level this century, as worries over the country’s economic outlook combined with a rise in global bond yields, stoked by US President Trump’s battle with the Federal Reserve. In a move that intensifies pressure on the Chancellor, Rachel Reeves, ahead of her Autumn Budget, the yield on 30-year UK government debt rose as high as 5.64% on Wednesday, its highest point for four months and just below a level last reached in 1998.
While global bond yields have risen in the wake of President Trump’s campaign against the Federal Reserve, and Germany’s moves to increase debt and spending, gilts have been hit harder than other bonds this month. If sustained, the recent increases in gilt yields would reduce Reeves’ headroom from £9.9 billion as of the spring Statement to £5.3 billion, according to an economist at Capital Economics. Increased debt servicing costs, combined with potential downgrades to growth forecasts by the Office for Budget Responsibility, might force the Chancellor to raise as much as £27 billion in her Autumn Budget to close the public finances.
Bond fund managers said the UK is facing a growing risk of stagflation, where persistent inflation makes it harder for the Bank of England to cut interest rates to support flagging growth. The rise in yields is also putting the Bank of England under growing pressure to slow down its quantitative tightening programme to shrink its balance sheet, which had expanded due to huge bond purchases made in past financial crises. The bank is reducing its balance sheet by £100 billion a year at present, partly through sales that analysts warn are pushing down gilt prices.
Fears are growing in the City of London that the Chancellor will target banks to help shore up the UK’s public finances, despite executives warning a tax raid on lenders would damage the government’s growth agenda. A surcharge on the sector’s profits or even a new bank levy is seen as a possible way to bolster the public finances.
Elsewhere, the UK unemployment rate is on track to hit 5% in the three months to August, according to Resolution Foundation research based on a range of job indicators. The official unemployment rate was 4.7% in the second quarter.
Commodity markets
In the commodity markets, Brent crude futures traded around $67.5 per barrel on Friday and are set to end the week marginally higher, after the White House said President Trump was not happy when he learned that Russia attacked Ukraine with missiles and drones. Russia hit Ukraine with deadly missiles and drone strikes early on Thursday, killing at least 21 people in Kyiv, city officials said. Meanwhile, the Ukrainian military said it used drones to hit two Russian oil refineries overnight.
Investors are also watching for India’s response to pressure from the US to stop buying Russian oil, after President Trump doubled tariffs on imports from India to as much as 50% on Wednesday. Russian oil exports to India are set to rise in September, dealers said, defying US pressure.
Oil prices were under pressure earlier in the week as investors braced for lower fuel demand after the US Labor Day long weekend marked the end of the driving season. Crude oil supply is also set to rise due to an OPEC+ plan to raise September output by 547,000 barrels per day.
Further pressuring oil prices, Russian crude supplies to Hungary and Slovakia through the Druzhba pipeline have restarted after an outage caused by a Ukrainian attack in Russia last week, Hungarian oil company MOL and Slovakia’s economy minister said on Thursday.
Gold prices traded around $3,410 an ounce on Friday, close to record levels, supported by a softer Dollar and safe-haven flows, due to ongoing concerns over the Federal Reserve’s independence.
Equity markets
US equity futures fell on Friday as investors looked ahead to the release of the Personal Consumption Expenditures price index figures, the Federal Reserve’s preferred inflation gauge, for fresh policy guidance.
In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.16%, the S&P 500 gained 0.32%, whilst the Nasdaq Composite advanced 0.53%.
President Trump’s attempts to force the Federal Reserve to cut interest rates in a bid to lower the US government’s financing costs and boost the economy could backfire spectacularly, economists have warned. President Trump has hit Federal Reserve Chair Jerome Powell with a barrage of criticism, insisting that the central bank should lower interest rates by as much as 3% from their current range of 4.25%-4.5%.
President Trump’s attacks reached a new pitch on Monday, when he moved to fire governor Lisa Cook, whom his administration has accused of lying on her mortgage applications. Cook on Thursday filed a lawsuit against the US President in federal court in Washington, alleging President Trump’s actions infringed on her constitutional rights and US law.
If President Trump’s efforts to fire Cook succeed, it would give him a majority of appointees on the seven-strong Federal Reserve board. All seven members have votes on the rate setting Federal Open Market Committee and hold sway over the renewal of the terms of regional Federal Reserve presidents, as well as governance of the central bank’s operations. President Trump’s actions represent a direct attempt to politicise the Federal Reserve, intimidate its leadership and bend monetary policy to the President’s will. This threatens to end the independence of the Federal Reserve and with it, the credibility of the US’s monetary policy both at home and abroad.
Elsewhere, the Bureau of Economic Analysis revised its estimate of US GDP growth in the second quarter upwards to an annualised 3.3% from an initial reading of 3.0%, primarily reflecting upward revisions to investment and consumer spending.
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