Market Commentary: week to 10 December 2024

The UK economy is grappling with challenges as business confidence falters and retail sales dip. The Lloyds Bank business barometer fell to a five-month low of 41%, highlighting economic uncertainty, though firms remain optimistic about their trading prospects. Surveys from the Confederation of British Industry and the Institute of Directors indicate shrinking private sector activity and the lowest business confidence since April 2020. Elevated borrowing costs and higher employment taxes are straining businesses, dampening hiring and investment. Despite these difficulties, the Organisation for Economic Co-operation and Development (“OECD”) forecasts stronger growth by 2025, driven by public spending, though inflation is expected to stay above target.?

UK Prime Minister Keir Starmer emphasised a balanced approach to foreign policy, rejecting the notion that Britain must choose between the US and EU, particularly with Trump's return. He highlighted Britain's commitment to Ukraine and a post-Brexit reset with the EU, framing stability as essential for economic growth. The OECD warned of fiscal challenges, urging tax reforms to sustain public finances amid potential shocks. Speculation about another national insurance tax hike looms, as Chancellor Rachel Reeves navigates tight fiscal constraints. Trade relations remained a concern, with confidence in averting US tariffs offset by public preference for closer EU ties. A YouGov poll revealed 44% of voters prioritise the EU over the US for the UK's economic future.

UK investors returned to equity funds in record numbers after the budget, with November seeing a net inflow of ￡3.06 billion, surpassing the ￡3 billion threshold for the first time. This included the first net inflow into UK equity funds in 42 months. However, concerns linger as London’s stock market shrinks rapidly, with 45 firms delisted in 2024, the highest since 2010. Experts urge government action to stem the exodus of capital from the UK market. US equities had a mixed week, with the S&P 500 and Nasdaq reaching record closes. Technology led gains, buoyed by strong earnings and Artificial Intelligence optimism. Outperformers included semiconductors, software and electric vehicles, while energy, banks and industrial metals lagged. Treasuries firmed slightly, and the dollar strengthened. Economic data showed resilient payrolls and improved Institute for Supply Management manufacturing. Federal Reserve sentiment leaned dovish, with a December rate cut now 90% likely.?

UK house prices saw their fastest growth in two years, with Nationwide reporting a 3.7% annual increase and Halifax posting a 4.8% gain in November. Monthly growth for October and November was robust, at 1.2% and 1.3%, respectively, driven by easing mortgage rates, strong labour markets and rising incomes. However, affordability remains a key challenge. Meanwhile, Prime Minister Starmer pledged to tackle planning bottlenecks to boost housebuilding, targeting 1.5 million homes in five years. His agenda aims to stimulate economic growth and improve affordability, countering long-standing barriers posed by bureaucratic and environmental opposition.

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