Written by Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown
The Bank of England’s latest stress test has shown the UK’s main lenders will be able to stomach worsening economic conditions.
This includes the effects of weakening commercial real estate prices, recessions, higher rates and inflation. The tests come as a relief during a time that’s been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies. A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK’s financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed.
The Bank of England also highlighted even smaller lenders are able to withstand a higher-rate environment. Overall, there aren’t too many people falling behind on their mortgage payments, but it’s widely acknowledged that the full extent of higher rates is yet to trickle down – and the point at which this happens is likely to have consequences for the wider economy and companies.
For now, the number of households with high debt-service ratios – including accounting for the higher cost of living – is expected to grow in the second half of the year, and companies exposed to customers spending their discretionary income will be watching this closely. In a chink of optimism, the BoE highlighted the proportion of such households with reducing spending power is expected to remain well below the peaks seen in 2007.
A broader financial stability report suggested that following from extreme turmoil seen since the last assessment in December, market risk sentiment has steadied. While the seas may not be as rough, there are obstacles to traverse. One such area was called out as being the high valuations of tech stocks in the US, which stand out amid a sea of more normalised valuations globally. The truth is, lots of macro-economic uncertainty still persists, which leaves very highly valued companies exposed to potentially sharp movements.
As the last country maintaining its blockade of Microsoft’s Activision takeover, the UK competition watchdog has called a truce with the software giant. Microsoft had been set to challenge the original decision to block the deal at the end of July, making this move an unexpected, but welcome turnaround.
The deal paves the way for Microsoft to squeeze more juice from its Xbox brand, as well as other gaming avenues. Gaming is largely seen as the most exciting arena in terms of profit potential, as its audience is already hugely significant for advertisers and it’s also been an important front-runner in early metaverse adoption.
Hotter-than-expected wage data has given the pound a mighty shove upwards, crossing the $1.29 mark – levels not seen since April last year. The movement comes as the higher pay data heaped further pressure on the Bank of England to turn the heat up on interest rates.
US annual inflation is expected to drop back to 3.1% for June, which would mark a twelfth consecutive decline. Some of the decline can be taken as a reaction from the very high-base starting point, following food and energy price spikes at the same time last year.
More important will be the core inflation number, which is expected to be running at around 5%. While the direction of travel is very much the right one, bringing core inflation closer to earth remains the main mission. That’s increasingly likely to culminate in further interest rate hikes from the Federal Reserve, despite a brief cooling in policy seen recently. The expected inflation slowdown, coupled with the UK’s banks passing stress testing, has seen the FTSE100 open up 27 points. Sentiment across Europe is more upbeat too.
Concerns that Russian output may be dropping has seen the cost of a barrel of Brent crude roll into the $80 arena. The cuts to Russian output have been four months in the making, and the global market is expected to tighten in the second half.”
