Geopolitics back in focus: UK share prices fell during October as concerns over the economic outlook were compounded by geopolitical uncertainties following the outbreak of the Israel-Gaza war. The FTSE 100 Index dropped by 3.8% over the month, while the FTSE 250 Index declined by 6.5%. Meanwhile, bond prices continued to fall: the yield on the benchmark ten-year gilt rose as high as 4.7% in October, reaching levels last seen during the Global Financial Crisis, and the 30-year gilt yield breached 5% during the month, climbing to its highest level since 1998.
Consumer pessimism: UK consumer confidence fell deeper into negative territory during October, according to GfK , reaching its lowest level since July. The deterioration reflects consumers’ pessimism over their finances in the run-up to Christmas amid growing expectations that interest rates are likely to stay “higher for longer”.
Lacklustre outlook: the International Monetary Fund (IMF) expects the UK economy to grow more slowly than other advanced economies in 2024, citing the impact of persistent inflation that will require tighter monetary policy for some time. The UK economy expanded by 0.2% during August, having contracted by 0.6% in July. The IMF downgraded its forecast for UK economic growth next year from 1% to 0.6%. In comparison, the US and the eurozone are predicted to grow by 1.5% and 1.2% respectively.
Inflation holds steady: having fallen for three consecutive months, the UK’s rate of inflation remained unchanged at 6.7% year on year in September. Food price inflation declined from an annualised rate of 13.6% to 12.2%. The IMF expects average consumer price inflation of 7.7% this year in the UK, falling to 3.7% next year.
Dividends declined in Q3: UK dividend payouts fell at a headline rate of 8.3% during the third quarter, according to Computershare’s Dividend Monitor , undermined by lower payments from the mining sector and smaller special dividends. On an underlying basis, dividends rose by 2.4%. Dividends from the utilities, banking, energy, and media sectors grew strongly.
Credit conditions take a toll: EY-Parthenon reported a total of 76 profit warnings from UK-listed companies during the third quarter. Although this represented an annualised fall of 12%, it was still 18% above the third-quarter average. As pressures on costs and supply chains eased, companies cited the impact of deteriorating credit conditions as the primary cause of warnings.
“Uncharted waters”: equity and bond prices fell during October as investors’ appetite for risk was blunted by geopolitical tensions and economic uncertainties. The World Bank warned that the Israel-Gaza war could “push global commodity markets into uncharted waters”, flagging the possibility that oil prices could rise above US$150 per barrel if the conflict continues to escalate. The price of Brent Crude oil rose above US$93 per barrel in October in response to the crisis. Meanwhile, the price of gold , which tends to rise during periods of instability, breached US$2,000 per ounce. Elsewhere, the VIX Index – which tracks expectations of future volatility – reached its highest level since March during October.
Default risk on the rise: the International Monetary Fund (IMF) warned that the risk of defaults from corporate and household borrowers has intensified, exacerbated by higher borrowing costs. The IMF forecast global economic growth of 3% this year and 2.9% next year, commenting : “Growth remains slow and uneven ... The global economy is limping along, not sprinting”.
Higher for longer: Strong economic data from the US fuelled expectations that interest rates are set to remain “higher for longer”, exacerbating the sell-off in bonds. The yield on the ten-year US Treasury bond breached 5% for the first time since 2007, while the 30-year US Treasury bond yield ended October at 5.08%. Having grown by 2.1% in the second quarter of 2023, the US economy expanded by 4.9% during the third quarter. Meanwhile, inflation remained unchanged at 3.7% year on year during September, confounding widespread expectations of a decline, although core inflation – which strips out volatile factors like energy and food – eased from 4.3% to 4.1%. The Dow Jones Industrial Average Index fell by 1.4% in October.
ECB holds rates: inflationary pressures in the eurozone appear to be easing as the eurozone’s annualised rate of consumer price inflation dropped from 4.3% in September to 2.9% in October. The European Central Bank left its key interest rate unchanged at 4% following a series of tightening measures. The eurozone’s economy contracted by 0.1% in the third quarter, stoking speculation over the possibility of recession. Nevertheless, optimism about the outlook for German businesses improved slightly during October, according to the Ifo Institute , although companies remained pessimistic about their current situation.
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