Market Report – US stocks drop for first time in months, Direct Line faces £30m cost to right overcharging customers

  • US market drops following personal consumption expenditure report which showed spending ticked higher in July.
  • Markets await crucial US payroll data later today, which will guide interest rate outcomes.
  • Direct Line to carry out a review of potential pricing breaches, overcharged customers to be reimbursed.
  • China increases efforts to boost the economy, reduces how much foreign currency deposits banks must keep as reserves.
  • Brent crude oil set to gain 4% this week as OPEC+ production curbs are expected to be extended.
Market Report – US stocks drop for first time in months

US markets racked up their first monthly losses since February on Thursday, despite a reasonable bill of health from the Bureau of Economic Analysis’s personal consumption expenditure report. This showed that consumer spending increased in July, adding further weight to the argument that consumer discretionary activity is proving resilient in the face of higher interest rates. The core index rose slightly to 4.2%, which was in line with expectations. Crucially, this data suggested that inflation is moving broadly as policy makers expect, despite remaining elevated.

Next up on the economic data front is the US payroll data due later. A tighter-than-expected job market will add fuel to the inflation fire, while a slowdown would be welcome and suggest that monetary tightening is starting to have some effect. There’s growing hope that interest rates are going to remain in their current position, rather than rise, at the next meeting, and the jobs data will be an important component of that. There’s also an argument to say that we’ve only just started restrictive cuts, everything else has been playing catch up to deal with inflation, so if heat is to come out the economy, cuts may be needed. There’s a disconnect between economic reality and interest rate expectations at the moment, which could lead to some disappointment on the markets.

The FTSE 100 has opened up slightly higher after closing down yesterday, as broader optimism about what data from across the pond will say sets in. One home-grown company that isn’t having the best end to the week is insurance giant Direct Line. It’s agreed with the FCA to carry out a past business review relating to pricing rules, following the news it’s charged home and motor customers more for their renewal than if they were a new customer. This is a big no-no these days amid the regulator’s efforts to make pricing fairer and more transparent. All instances where a customer has overpaid will see Direct Line provide so-called ‘appropriate redress’. Direct Line thinks these payments will cost around £30 million, but it’s not so much about the money as it is about reputation. The group’s been in a tricky spot in recent years, and encouraging customers to come to you and stay there is a far harder task when trust has been broken.

China has taken a more aggressive approach to stimulate the economy, as it relaxes how much foreign currency banks are required to hold as reserves. This news comes along with a wave of new stimulus efforts as a creaking property market, weakening global demand and rising unemployment all take their toll. The changes to the reserve requirements are expected to support the renminbi, which has lost over 5% against the dollar this year. Broader questions about the debt-laden property sector are still likely to be front of mind, and the extent of the boost these new stimulus efforts will have will take a while to come through – if at all.

Brent crude is headed for $87 a barrel, set to gain around 4% this week. Supply tightening is the main driver as OPEC+ production cuts are expected to be extended. The market expects Saudi Arabia to extend a voluntary oil production cut of 1 million barrels per day, and for Russia to push forward with export cuts through next month as well. To add to the concern, US inventories have also fallen by far more than expected.

The article is written by Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown.