Susannah Streeter, Chief Investment Strategist, Wealth Club: “There’s been cautious optimism unfolding on the Footsie in early trade as investors assess the likelihood of Middle East peace talks progressing and digest relatively stable UK growth figures.
Brent crude has inched down again, a measure of hope that negotiations will advance, even though the situation remains somewhat unpredictable. Control of the Strait of Hormuz is set to remain a sticking point in discussions amid concerns that tolls could be imposed after the 60-day free-transit grace period has expired.
The latest assessment of UK economic health also provides some reassurance that the economy is still eking out growth. The pound has risen a little but is still languishing around $1.32, sharply down from this year’s highs back in January of around $1.38. The snapshot shows the economy is hardly firing on all cylinders. While first-quarter growth held steady at 0.6%, the downward revision to annual growth to 0.9% is a reminder that the recovery remains fragile. Encouragingly, business investment and exports were revised higher, suggesting companies are still prepared to commit capital despite high levels of unpredictability on the global and domestic scene. However, the economy continues to rely heavily on consumer and government spending to fuel growth. If Andy Burnham does get the keys to Number 10, he'll face a supremely tricky balancing act. While his vision outlined yesterday to power up growth in the regions may resonate politically, it was light on detail about how productivity, private investment and skills shortages would be tackled in practice. Investors will be looking for a clearer roadmap showing how growth can be boosted sustainably without unsettling bond markets or putting further strain on already stretched public finances.
Sainsbury's results are like a mirror image of what’s happening when it comes to spending across the wider UK economy. While grocery sales remained robust, reflecting continued spending on essentials, weaker performance at Argos and across clothing and general merchandise suggests consumers are still hesitant to splash out on discretionary purchases. Concerns about the impact of the Iran war are still bubbling away in the background, with households bracing for higher bills, and that's also likely to have an impact on spending patterns. While Sainsbury's has maintained its full-year profit guidance, the repercussions from the Middle East conflict still may not have fully fed through, with the company highlighting continued uncertainty ahead.
The retailer has been helped by some timely tailwinds, with the heatwave driving demand for fans, summer food, drinks and seasonal products, while the World Cup has boosted sales of large-screen TVs and party essentials. However, with Argos sales still slipping overall, it's clear these seasonal boosts haven't been enough to overcome wider consumer caution. Shoppers appear willing to spend on immediate needs and special occasions, but are still looking for value and carefully weighing up non-essential purchases.
Given its tech-light nature, the Footsie has largely missed out on the recovery party, which saw US-listed tech stocks sharply rebound after last week’s sell-off. There’s been plenty of opportunistic buying going on, and Amazon’s addition to the Dow Jones helped lift spirits further. While Amazon joining the famous index is largely symbolic, inclusion in one of the world's best-known stock market indices can boost visibility, reinforce investor confidence and generate some buying from funds that track the Dow. However, the bigger factor is still likely to be sentiment-driven, with investors hopeful that, with some inflationary pressures easing due to lower energy prices, and earnings season approaching, there could be more upside to come for the sector. A bit more caution is creeping in ahead of the closely watched monthly jobs snapshot due to land on Thursday, with US indices set for a flat start to trading. The non-farm payrolls report is arriving a day early due to the Friday holiday, and will be a gauge of how hot the economy is running. May’s numbers came in much stronger than expected, with 172,000 new hires compared with 85,000 forecast. While hiring is expected to slow a little in June, the World Cup may obscure the picture, with a temporary uplift in workers needed to cater for armies of fans. So the rate of wage growth is likely to be the figure investors will lock onto, and if it beats expectations of 3.5% year on year, it could ignite fresh worries about how high interest rates may go.”
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