Yesterday’s European market session was a fairly subdued affair, even if it was a positive one, with the FTSE100 trading in one of its narrowest ranges this year.
By and large many companies have been reporting decent numbers and have been able to pass on the increase in costs, to their customers, without a significant impact on their sales growth numbers, or their margins.
“While this is certainly encouraging there is no guarantee it can continue given that the over the next quarter costs will have increased further given the continued rise in raw materials and energy prices, and other supply chain disruptions,” commented Michael Hewson, chief market analyst at CMC Markets UK, this morning.
“It is true that the build-up in savings levels by consumers over the pandemic, means that there is still an available buffer, but as the outlook darkens, that doesn’t mean consumer will go out and spend it, as concerns over demand destruction grow.”
For now, that doesn’t appear to be worrying US investors with the Dow posting a new record intraday high, and the S&P500 coming to within touching distance of doing the same thing.
“This US exuberance isn’t translating into today’s European open which looks set to be weaker one, after markets in Asia came under pressure, with Evergrande shares once again getting clobbered as trading restarts there, while concerns about rising covid cases as winter approaches is again taking its toll,” Hewson said.
UK public sector borrowing hit £20bn in August, as the costs of the pandemic continued to take their toll on the government’s finances.
Six months ago, “this probably wouldn’t have been too much of an issue, however given the sharp rise in inflationary pressure seen since March when RPI was at 1.5 per cent, measures to try and rein in the amount of government borrowing have moved up the governments list of priorities, especially since debt interest payments, which are linked to RPI have more than doubled after RPI hit 4.9 per cent in September,” Hewson explained.
This, combined with a slowdown in the UK economy as a result of supply chain and workforce disruptions, labour shortages, as well as rising energy costs, has raised concerns about the sustainability of current borrowing, at a time when the UK economy is slowing from its post lockdown rebound.
“With little sign that the pandemic is anywhere close to an end point, the Chancellor next week will be hoping to try and find a way to help underpin the government tax receipts at the same time as not acting hastily and tipping the economy into a self-inflicted slowdown,” Hewson noted.
Today’s September borrowing numbers are expected to see another big deficit, even with the costs of furlough coming to an end, with another increase, up to £22.6bn.
Last week US weekly jobless claims came in at a new post pandemic low of 297k, as the divergence between them and recent payrolls numbers becomes ever more puzzling.
“Continuing claims have also continued to decline, as they come within touching distance of the 2.5m level. Expectations are for another decline to 293k, with continuing claims expected to fall to 2.55m,” Hewson concluded.