The Cambridge Weekly- 19th January

Oil prices remain a key focus for investors, with both US plans to begin extracting oil from Venezuela’s vast reserves and the unclear situation in the Iran influencing prices. Iran partially controls the Strait of Hormuz, a narrow passage connecting the Persian Gulf to the Gulf of Oman, which sees almost 20% of the world’s supply of oil pass through it daily. Therefore, this can act as bottleneck to global oil supply should issues arise. However, oil prices fell more than 4% last Thursday as news of de-escalation in the Middle Eastern region emerged from the White House.

Japanese Prime Minister Sanae Takaichi is rumoured to call a snap election in the coming weeks in an attempt to obtain a majority for her Liberal Democratic Party, thereby strengthening her ability to enact policies. Takaichi became Japan’s first female prime minister in October last year and has seen her approval ratings soar thanks to her clear, no-nonsense approach to foreign policy and economic growth.

The Nikkei 225 reached a record high last week, already adding 6% to the 26% gain it saw last year. However, long-term government bond yields have been steadily climbing since she took office, and the Yen is at its weakest level against the dollar in 18 months, reflecting investor caution over rising fiscal deficits and increasing inflation pressures.

US Equity Market:
Corporate earnings kicked off last week with major US financial institutions taking the spotlight. Results were mixed across the sector, and some releases were disappointing, driving a 0.5% drop in the S&P 500 last Wednesday. BlackRock, the world’s largest asset manager, reported its biggest ever quarterly inflows of capital, reaching assets under management of over $14tn for the first time.

Warner Bros, the film and television studio famed for the Harry Potter franchise and the DC Comics universe, has been an acquisition target for both Paramount and Netflix in recent months. Following Warner Bros recommendation that shareholders vote in favour of Netflix’s bid, Paramount have launched a lawsuit to try and block the deal and continue their pursuit. Since the initial announcement in October that Warner Bros would be up for sale, both Paramount and Netflix have seen their stock prices fall around 20% and 30% respectively, whereas Warner bros have seen almost a 50% surge.

Over the week to Friday, both the S&P 500 and Nasdaq indices fell 0.36% and 0.91%, respectively.

UK Equity Market:
Last Thursday’s UK Gross Domestic Product (GDP) data release from the Office for National Statistics revealed that the UK economy grew 0.3% across November. This increase exceeded analysts’ expectations for 0.1% growth, with the outperformance attributed to an expansion in the services sector and manufacturing.

In UK infrastructure, UK Chancellor Rachel Reeves has indicated that £45bn will be spent on upgrading the rail system in Northern England. This project, alongside the ongoing project for a third runway at Heathrow airport, which remains in the planning phase, is evidence of the UK government pursuing the boost to UK growth they outlined in their manifesto.

Over the week to Friday, the FTSE 100 rose 1.12%. Sterling continues to trade at around 1.34 against the US Dollar.

Inflation, Interest Rates and Bond Markets:
Last Tuesday, the U.S Bureau of Labour Statistics revealed that US Consumer Price Inflation remained flat at 2.7% in December. Though this remains above the Federal Reserve’s 2% target, the unchanged level suggests that price pressures in the world’s largest economy remain under control. This will be a critical data point for the Federal Open Market Committee at their next meeting to vote on the headline interest rate at the end of this month.

After the November budget, a more sustainable path for UK public finances was established and investors outlook for the economy has improved. This improvement in sentiment, coupled with the positive GDP data release, has resulted in 10-year gilt yields trending downwards, falling as low as 4.34% last Wednesday. This will be a significant relief to Rachel Reeves, with 10-year gilt yields acting as the benchmark for UK long-term borrowing costs. As a reminder, bond yields move inversely to prices.

What’s on the horizon
On the macro front, China reported its fourth quarter GDP figures today. With impressive export figures being reported last week, investors will be eager to see how the trade data fits into the bigger picture. In the UK, December’s inflation data is due to be released on Wednesday. With economists expecting two or three interest rate cuts this year, stable/easing inflation figures could create a clearer trajectory for the Bank of England. The US will release additional inflation figures for December on Thursday.

The Bank of Japan is due to meet on Friday to make a decision on monetary policy. Having raised interest rates to 0.75% in December, they are widely expected to hold rates steady at this meeting, however the consensus expectation is that rates will increase further in 2026.

The Cambridge Team

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Source of financial market data: MorningstarDirect.