UK market selloff intensifies
The pound fell to its lowest level in over a year, stocks declined, and gilts marked their fourth consecutive day of losses amid worries that the Labour government will have difficulty managing the deficit as borrowing costs rise.
Sterling dropped for a third session, plummeting nearly 1% to $1.2239, the lowest since November 2023. Gilt yields surged sharply at the open, with the 10-year yield climbing by up to 13 basis points to 4.92%. The UK’s FTSE 250 Index, which is more focused on domestic companies, fell by as much as 1.1% to its lowest point since April, trending towards its worst three-day decline since August.
UK assets are currently at the heart of a global selloff, triggered this week by Donald Trump’s latest tariff threats and concerns that inflation may stay high longer than anticipated. The rapid declines have evoked memories of the fallout from Liz Truss’s problematic mini-budget in 2022.
Although measures have been enhanced in the market to avert a crisis of that magnitude, the rising debt burden faced by the government is again alarming investors. A former Bank of England policymaker has even likened the situation to the 1976 debt crisis, which led the UK government to seek a bailout from the IMF.
Fed minutes show officials were eager to slow interest rate cuts
In December, Federal Reserve officials shifted their approach to rate cuts due to ongoing inflation concerns, opting to proceed with more caution in the upcoming months.
Minutes from the Federal Open Market Committee’s meeting on December 17-18 revealed that “participants indicated the committee was at or nearing the appropriate point to reduce the speed of policy easing.” Many participants noted that several factors necessitated a careful method for making monetary policy decisions in the near future.
They pointed to rising inflation figures, persistent consumer spending strength, and diminished downside risks regarding the labor market and overall economic activity, as indicated by minutes released on Wednesday in Washington. At that meeting, US central bankers lowered their benchmark lending rate by a quarter-point, setting it to a range of 4.25% to 4.5%.
BOJ indicates wage progress, no clear hike timing
The Bank of Japan noted progress in wage growth but avoided making any clear indications about a potential interest rate hike this month.
The quarterly summary released on Thursday stated, “Overall, many executives reported that the recognition of the importance of sustained wage increases is spreading across various industries and businesses of different sizes.” This shift in awareness was attributed to structural labor shortages and rising minimum wages.
At the same time, the central bank highlighted a continued reluctance regarding wage increases, particularly among smaller companies, which are still observing their competitors’ decisions.
This blend of perspectives kept the report mostly balanced, suggesting that both January and March could be viable candidates for a rate increase. Those monitoring the BOJ were looking to this report for any clues about whether the bank would raise rates this month, as wage growth has become a significant focus in its goal for stable inflation.
However, the BOJ remains open to different options amid mounting uncertainties, especially following recent provocative statements from President-elect Donald Trump.
German industrial production rises, indicating stabilization
In November, German industrial production showed positive growth, raising hopes that the struggling manufacturing sector might be stabilizing as 2022 closed. Output increased by 1.5% compared to the previous month, surpassing economists’ expectations of a 0.5% rise in a Bloomberg survey. However, on a three-month scale, output was down 1.1%, according to the statistics office’s report on Thursday.
The German economy is sending mixed signals, highlighted by a report on Wednesday revealing a significant decline in factory orders, which fell 5.4% in November. This drop was influenced by the volatile nature of large-scale orders; excluding these, the figure would have risen by 0.2%.
The manufacturing sector continues to struggle, with fears of deindustrialization looming ahead of the February snap election. Chancellor Olaf Scholz is likely to face defeat against Friedrich Merz’s conservative CDU/CSU bloc. The current downturn is primarily attributed to soaring energy costs and rising input prices, which are undermining Germany’s global competitiveness.
Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.
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