HL commentary as it happens

Oil extends gains as US-Iran tensions rise

Oil is extending its gains, with Brent crude back above $70 a barrel this morning, building on its strongest daily gain since late October as fears of a military confrontation between the US and Iran rattled energy markets. Nuclear talks between the two sides appear to be going nowhere fast, and the geopolitical premium is clearly back in play. That’s overshadowing a modest draw in US crude inventories that did little to shift the supply picture.

Fed minutes reveal a house divided

The January Fed meeting minutes made for uncomfortable reading, revealing a central bank struggling to find consensus on where rates go from here. In a notable hawkish twist, some officials floated the idea of raising rates if inflation proves stubborn - a far cry from the rate-cutting narrative markets had been banking on. Others maintained that further cuts would be warranted if price pressures continue to ease, leaving the outlook as clear as mud. Bond yields drifted higher following the release, a reminder that the path forward for monetary policy is anything but straightforward.

Wall Street edges higher despite rate jitters

US markets closed in the green last night, with the S&P 500 up 0.5% and the Nasdaq leading the way with a 0.8% gain. It looked set to be an even stronger session, with the S&P 500 up as much as 1% at one point, but the mood cooled after the release of the Fed's latest meeting minutes. US futures are pointing higher this morning, suggesting investors may be ready to look past the Fed noise and push on.

FTSE 100 hits new highs as inflation cools

The FTSE 100 powered to yet another record high yesterday, surging over 1% after UK inflation dropped to 3.0% in January, its lowest level since March last year. Markets now see an 80% chance of a move in March, and with weak jobs data earlier in the week painting a similar picture, the interest rate path looks increasingly supportive for UK equities. The index couldn’t quite hold onto its new title for long, with the FTSE 100 down a touch at the open as investors get stuck into another busy day for corporate results.

Inflation has fallen to a 10-month low thanks to falling fuel and food prices

UK inflation has fallen to 3% for the month of January, down from 3.4% the previous month, according to the Office of National Statistics. Lower fuel and airfares helped ease pricing pressures, as did slower inflation for food and non-alcoholic drinks. Core inflation, which excludes the often-volatile prices of food, energy and alcohol also fell on the previous month, as did services inflation, which has been sticky on the last year. These measures moving in tandem suggests that the outlook from here will be lower inflation, and the Bank of England expects inflation to fall to the target of 2% this year. The welcome news comes following yesterday’s weaker jobs data, meaning a March rate cut now looks certain.

Last time the Monetary Policy Committee met, the vote was split 5-4 to hold rates vs cut them, so the market trajectory is not a surprise – what will be key is the cadence and velocity from here. We expect that the MPC will cut twice this year, having favoured a cautious approach. Markets looking for forward guidance will no doubt place emphasis on the rhetoric from Bank of England Governor, Andrew Bailey, in the press conference following next month’s decision.

Gilt yields have fallen over recent days, with the 10-year dropping below 4.4% having been above 4.5% at the end of last week. As well as supportive UK data, there is also some contagion from the US, where the 10-year Treasury yield has fallen by nearly 20 basis points since the start of last week.

UK jobs data reveals post-pandemic employment bounce is well and truly over

UK jobs data may not have moved the equity market much this morning, but it has ramped up market expectations of rate cuts through 2026. Unemployment rose slightly to 5.2% for the three months to the end of December, according to the Office of National Statistics, and there are more people out of work looking for jobs. Redundancies are also up. The post-pandemic jobs boom is well and truly over, and wage inflation is slowing. We agree with the market that this weakness in data confirms expectations that the Bank of England Monetary Policy Committee will cut rates next month - remember there was a split vote last time around - but we don’t think it’s bad enough to tilt the Committee to abandon its slow and steady approach. Two cuts through the year is still our base case, given where inflation is and the current trajectory. That said, if jobs data continues to weaken, and is coupled with stagnant or non-existent economic growth, we could see a ramping up of cuts in the second half.

Oil prices slipped slightly lower as US-Iran negotiations continue.

Brent Crude prices slipped slightly lower on Tuesday morning to around $68.2 per barrel, as the US and Iran are set to resume nuclear talks today. There’s speculation that Iran could agree to dilute its most highly enriched uranium in exchange for the full lifting of financial sanctions, but it’s not clear if that will be enough to seal a deal between the two parties.

Gold prices fall after traders take a holiday.

Gold prices have dropped more than 1% to around $4,920 per ounce this morning. That marks the second consecutive session of losses, partly due to weaker trading volumes resulting from public holidays in key markets such as the US, as well as in China and several other Asian countries for the Lunar New Year.

US stock futures move lower as AI-related fears continue.

After closing yesterday for a public holiday, US stock futures are trading lower today as AI-related fears continue to weigh on sentiment. Insurance brokers, wealth advisors, real estate services, and logistics were all in the firing line last week, and investors are cautiously watching for what slice of the market could be next on the AI hit list. With recent moves seeming rather disconnected from fundamentals, it’s simply not clear what part of the market the AI fears will come down on next. But for context, the US software and services sector is now trading at a discount to the broader sector for just the second time in 30 years.

FTSE marginally up at the open

The FTSE 100 had a subdued start this morning, opening only slightly up as there was little news from big hitters to nudge it in either direction. Reports continue to trickle out into the media that the UK Government is considering tweaking its support for first-time buyers by potentially reviving the Help to Buy scheme, or something similar. This comes as new home sales are struggling due to buyer affordability issues, and the government’s target of delivering 1.5 million new homes this parliament looks like a difficult hill to climb at this point. The key to any government support being effective for potential buyers will be to create a positive cost advantage over renting, likely through shared equity, which should help reduce monthly mortgage payments.