- Relief wave ripples through after Fed’s decision to keep interest rates on hold.
- Bank of England policymakers due to decide if a pause button will be pressed on rate hikes.
- Brent crude hovers around $85 a barrel amid hopes Middle East violence will not spread.
- Shell announces share buyback programme after earnings boosted by higher oil production and gas trading.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’There has been a wave of relief that the Fed didn’t rock the boat and stuck to the expected course by keeping interest rates on hold. This has reassured investors lifting stocks on Wall Street, buoying trading in Asia and filtering through to expectations of an upbeat early session for the FTSE 100, pending the Bank of England decision.
The Fed pauses.
US Policymakers opted to pause again, freezing interest rates at historic 22-year highs, keen to wait until the effect of previous hikes has fed through. This is easing concerns that the Fed might tip the economy over into recession, if the monetary policy grip becomes too tight. For now, investors seem more confident that a goldilocks economy, not too hot but not too cool, will return to scare away the bears. Inflation is still elevated but with long-term interest rates having surged, and borrowing so much more expensive, these tighter financial and credit conditions are expected to push down demand going forwards. Economic conditions could still deteriorate sharply, so this bout of confidence still risks being wishful thinking, but a steeper downturn would hasten rate cuts next year.
Bank of England decision looms
With the Fed holding rates even as the US economy barrels along, there are high expectations that the Bank of England will also keep rates on hold, particularly given the more fragile state of growth. Interest rates are at a 15-year high, and policymakers are expected to stay in their ‘wait and see’ stance, as demand already appears to be seeping out of the economy. A jump in company insolvency rates and a housing market in the deep freeze are signals that the sharp hike in rates is already being keenly felt, and that’s even before the full effects come through. Inflation may be still at 6.7% at the last snapshot, three times the bank’s target, but upcoming data is expected to show it fell more markedly in October. Investors will be keen to sift through the Bank of England’s outlook to assess if the government’s ambition to halve inflation by the end of the year might be met. If policymakers opt for another pause clues will be sought about just how long interest rates will be held at these elevated levels. The march upwards in oil prices since July has been worrying, but Brent Crude has dropped back from the highs reached in September. The benchmark is now trading around $85 a barrel as hopes remain that despite the devastating humanitarian situation in Gaza, conflict won’t spread to the wider region.
Shell announces more share buybacks.
Shell has not bucked expectations, unpacking underlying earnings of $6.2 billion for the third quarter. This position of strength has prompted it to announce share buybacks of $3.5 billion over the next three months, up from $2.7 billion in the previous three months. Revenues have been boosted, not just from the creep higher in oil prices, but also by higher margins in its refining business. Shell is also a leading supplier of Liquified Natural Gas and, although scheduled maintenance kept the taps tighter, with production across the integrated gas division down 9%, earnings from its gas trading business ticked up. Tighter supply has enabled the company to make higher margins diverting gas away from other regions to Europe where it’s still in high demand. Higher oil prices have coincided conveniently for Shell with a 3% increase in production in its Upstream division, reaching the equivalent of 1.75 million barrels of oil a day. Shell is still flirting with an all-time high in its share price, with the decision by CEO Wael Sawan to refocus on the hydrocarbons business, while pivoting more slowly to renewables. Oil supply and demand is likely to stay unpredictable and governed by geo-political developments, as well as global economic forecasts. But the decision by Saudi Arabia and Russia to cut production until the end of the year is keeping a higher floor on prices. While there is still progress being made in the green transition, Shell needs to keep its eye on the ball as there remains the threat that oil & gas could suffer the same fate as tobacco companies, given the increasing ESG focus of investors.’’
