Markets were ruffled by the missile attacks in the Middle East which are threatening to cause another energy crisis and have cast a shadow over the Chancellor’s Spring Statement today.
The FTSE 100 was down 130.44 points (1.2%) at 10,780.11, its biggest one-day fall since November, but still where it was trading early last week following its recent stellar rise. Travel and airlines were among the losers, but defence stocks rose.
In the US indices the S&P 500 and the Nasdaq were higher, though the Dow Jones fell.
Oil prices rose again this morning after jumping at the weekend by 7% to just below $80 a barrel, and 30% higher on the price in December. This has raised concerns that inflation will rise and interest cuts will be delayed.
Traders are pricing in a 74% chance that the Bank of England will cut rates this month, down from about 78% last week and that a cut may be delayed until May.
This led investors to sell government bonds, pushing up yields, which move inversely to prices. The yield on a ten-year UK government bond, also known as a gilt, climbed to 4.38%, from 4.23% at the end of last week.
Market volatility is the backdrop to the Chancellor’s Spring Statement which will be a progress report on inflation and her economic plan.
As Daily Business reported at the weekend, Rachel Reeves will note that the UK could face more economic headwinds as a consequence of the conflict in the Middle East.
Forecasts are having to be recalculated and even the Office for Budget Responsibility’s assessment of the state of the UK economy, which will be delivered before the Chancellor’s statement, may need to be revised.
She will be buoyed by data showing the UK annual inflation rate was 3% in January, down from 3.4% cent in December. Food price inflation is slowing, up 1.1% year on year in February, against growth of 1.5% in January, according to the British Retail Consortium. On the downside, unemployment is rising and business investment remains tepid.
Danni Hewson, financial analyst at AJ Bell, said: “The uncertainty generated by the conflict in the Middle East could knock the country’s economic journey off course, and already expectation that the Bank of England will cut interest rates in March has been dialled back.
“Today’s update from the British Retail Consortium feels massively out of date considering nervousness about the potential impact on global prices from the current conflict in the Middle East.
“Whilst February delivered an improving picture as retailers battled for our patronage, the price of food is still considerably higher than it was a year ago.”
The Chancellor will insist her plan is on track. She will say: “This government has the right economic plan for our country … in a world in that has become yet more uncertain.
“Stability in the public finances, investment in infrastructure and reform to our economy.
“Building growth not on the contribution of a few people or a few parts of the country, but in every part of Britain with a state that doesn’t stand back, but steps up.”
“Because of the decisions we have already taken, we have a stronger and more secure economy. Inflation and interest rates falling. And in every part of Britain, working people are better off.”
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