Market Report: UK poverty warning pushes down pound while ‘chip wars’ add to China woes.
• Grim forecasts about poverty spreading in the UK amid cost-of-living crisis
• The pound has been pummelled to fresh lows against the dollar reaching $1.15
• FTSE 100 and FTSE 250 open lower, with retailers, consumer goods companies and commodity giants down
• Covid rears up again in China adding to concerns about the fragile global economy
• Fresh front in the ‘chip wars’ opens up, with Nvidia caught in the crossfire.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
Grim forecasts about poverty spreading across the UK this winter highlight the deepening woes for the UK economy. With such a bleak winter ahead, the pound has been pummelled to fresh lows against the dollar, with sterling dipping below $1.16, to $1.157. This latest drop has rounded off a torrid month for the pound which has fallen by more than 5% against the dollar in August. It’s partly because of the higher interest rate expectations in the US, while in the UK the Bank of England might be forced to slow down rate rises in the months to come, given that Britain faces the deepest living standards squeeze in a century.
The frightening forecast from the influential think tank The Resolution Foundation that 3 million people will be forced into absolute poverty highlights the threat to revenues for companies reliant on discretionary spending. When John Lewis starts offering free food to its army of partners who in normal times would be considered resilient, it highlights expectations that vast swathes of middle-class workers will also be sideswiped by this cost-of-living catastrophe. Both the FTSE 100 and the more domestically focused FTSE 250 have fallen back in early trade, with retailers and hospitality firms losing ground as worries rise about tougher times ahead. Reckitt Benckiser is the biggest faller on the FTSE 100, with its shares dropping by more than 5% on news of change at the top of the company. Chief executive Laxman Narasimhan is stepping down to pursue opportunities in the US. He’s been at the helm for 3 years and was considered to be a steady hand at the tiller, which is why his departure has disappointed investors. But shares are also likely to have been hit by wider concerns that loyal customers may begin trading down to cheaper brands faced with the intensifying cost-of-living crisis. Unilever has also dropped by 1%, as worries rise about whether the big brand pulling power of consumer giants will weaken.
For now, there are still some signs that shoppers in Europe are spending with a devil may care attitude, before their budgets are pummelled by rising borrowing costs and the march upwards in prices continues. German retail sales rose 1.9% in July, but this looks set to be the calm before the storm, given that inflation, already at 9.1% in the eurozone, is expected to keep rising, squeezing budgets further.
Covid has reared its menacing head again in China sending fresh jitters through financial markets about the weakening global economy. That’s reflected in the price of oil which has scuttled back below $95 a barrel for Brent Crude, amid expectations of weaker demand. Commodity giants Glencore and Anglo American are also sharply lower in early trade, buffeted by concerns about China’s fragility. Restrictions have been imposed in numerous Chinese cities, from the tech hub of Shenzhen in the South to Chengdu in the West and Tianjin in the North. With millions of citizens facing strict curbs on movement, it’s feared China’s fragile recovery will go into reverse and August’s dip in factory activity won’t be a blip but instead will linger for much longer. There has been another discouraging snapshot for the manufacturing sector, with the Caixin/Markit purchasing managers’ index (PMI) dropping to 49.5 in August from 50.4 in July, with anything below 50 indicating a contraction. There had been forecasts for a slight increase in activity but instead, problems are still piling up for the Chinese companies. They’ve had to cope with power rationing imposed in response to the severe heatwave and drought and although this has eased, Covid has thrown fresh obstacles in their path. Hopes will be pinned on a policy shift to be announced at the 20th Party Congress in mid-October, and for the strict Zero-Covid policy to be eased, given the extent to which it is holding back any meaningful recovery.
A new front has broken out in the ‘chip wars’ between the US and China, with chip makers Nvidia and AMD caught in the crossfire. The shortage of semi-conductors was already becoming a source of geo-political tension as the US and China battle for tech supremacy, and now Washington has fired its latest shot by imposing restrictions on the sale of artificial intelligence chips. New licences are now being required to ensure AI chips are not used in or diverted to a military end use, in China or Russia. This development is likely to put the brakes on the Chinese tech sector given the difficulties China has faced in attempting to develop its domestic semiconductor industry. The new rules will affect Nvidia’s exports of A100 and H100 chips, which are designed to speed up machine learning tasks. This could hardly come at a worse time for Nvidia given that the last quarter was already highly challenging due to supply chain snarl ups and slowing demand for gaming consoles. Its artificial intelligence prowess is considered to be the engine for future growth at the company, which is why these strict new rules come as a severe blow. Being at the cutting edge of pioneering industries can be a huge advantage but, as this development shows, it also presents significant risks. It’s little surprise that given the uncertainty ahead for such a key growth driver for Nvidia, its share price fell 6.5% in after-hours trading, with AMD shares also falling by 3.7%.