Wall Street opened lower on Tuesday as US debt-ceiling talks continued in Washington.
President Joe Biden and Republican House speaker Kevin McCarthy held "productive" discussions on Monday but no agreement was reached.
In the UK, government borrowing hit £25.6bn ($31.77bn) last month due to the cost of energy support schemes, an inflation-linked increase in benefit payments and rising debt interest, according to new figures from the Office for National Statistics.
The Bank of England (BoE) said inflation has “turned the corner” and is on its way down. However, governor Andrew Bailey also said further monetary tightening would be needed if inflation persists.
Meanwhile, the International Monetary Fund (IMF) said it no longer expects Britain's economy to fall into a recession this year and has upgraded its forecasts.
FTSE 100 and European stocks
The FTSE 100 (^FTSE) fell 0.12% to 7,762.01 points in London afternoon trade, while the CAC 40 (^FCHI) in Paris declined 1.21% to 7,387.33 points. In Germany, the DAX (^GDAXI) fell by 0.37% to 16,163.20 points.
BT (BT-A.L) was among the main risers on the FTSE 100 index thanks to Altice UK, which is upping its stake in the company, while RS Group (RS1.L) was bottom of the basket following its full-year results.
"Last week BT’s earnings sent shares sharply lower. Clearly Altice UK judged that now is an opportune moment to acquire further shares at an attractive price point with the stock down several percent since last week," Victoria Scholar, head of investment at Interactive Investor, commented.
US and Asia markets
In the US, Wall Street opened in the red as traders monitored the latest negotiations on a US debt-ceiling deal.
“There might very well be fatigue in news headlines already, but the debt ceiling negotiations are dominating everything from a theme perspective. As it stands, investors still refuse to realistically price in the prospect that the United States will run out of money within 10 days from now,”Jameel Ahmad, chief analyst at CompareBroker.io, said.
“This is because everyone is in on the act and aware that what is taking place within Washington at the moment is just a political drama. With that being said, it is not helpful to sentiment and the situation overall is bringing more uncertainty to the mind of investors when they are already puzzled over more than enough matters.”
In Asia, markets were mixed overnight. Tokyo’s Nikkei 225 (^N225) was down 0.42% to 30,957.77points, while the Hang Seng (^HSI) in Hong Kong lost 1.29% to 19,425.10. In mainland China, the Shanghai Composite (000001.SS) was also in the red, down 1.31% to 3,253.16 points.
“Japan’s flash manufacturing PMI hit 50.8 in May, rising above the pivotal 50 boom-bust divide, ahead of April’s reading of 49.5, representing the first growth in factory activity since October. However, the Nikkei snapped its eight-session winning streak to close in the red,” Scholar said.
UK inflation data on Wednesday will likely further impact the pound this week, with analysts expecting price pressures to have eased in Britain last month.
“Economists are eyeing a near two percentage point decline in the headline number to just 8.2% that, if confirmed, could weigh on expectations for UK interest rates and the pound,” Matthew Ryan, head of market strategy at global financial services firm Ebury, said.
Meanwhile, oil prices reversed earlier losses on Tuesday afternoon after another warning from Saudi energy minister Prince Abdulaziz bin Salman that short-sellers will be "ouching" as they did in April.
"Watch out" was the message ahead of the next OPEC+ meeting early next month in what may be a sign that the group is considering cutting output once more amid a more bleak global economic outlook, according to Craig Erlam, senior market analyst at OANDA.
"Of course, actions speak louder than words and traders haven't been overly deterred by his words, despite the group having announced two sizeable cuts in the last year that briefly shook the markets," he said.
"Crude remains below the levels of December to early March and then April, but recent momentum has been more bullish. A break of $77.50 in Brent could signal a sentiment shift in oil markets after repeated wobbled following the bank failures in the US."
A raft of economic data from the UK kept investors busy on Tuesday.
The International Monetary Fund (IMF) said it no longer expects Britain's economy to fall into a recession this year and has upgraded its forecasts.
It now anticipates the UK economy to grow by 0.4% in 2023, rather than shrink by 0.3% as the IMF had forecast in April.
Meanwhile, the Bank of England (BoE) said it believes that inflation has “turned the corner” and is on its way down but further monetary tightening would be needed if inflation persists, meaning interest rates can still go up.
Read more: UK to avoid recession — but there's a catch
UK public sector net borrowing (excluding public sector banks) hit £25.6bn in April, the second highest since records began and £11.9bn higher than April last year.
Public sector debt, excluding public sector banks, hit £25.6bn at the end of April, around 99.2% of GDP with the debt-to-GDP ratio reaching the highest since the early 1960s.
“The government’s debt interest payable hit £9.8bn, the largest since records began in 1997 and up £3.1bn year-on-year,” Scholar said.
“Borrowing in April was £3.1bn above the OBR’s forecast because of the combination of higher total public sector spending and roughly flat tax receipts versus April last year. The government spent £3.9bn on subsidies in April, largely due to support for energy bills. It also paid £25.4bn on net social benefits and £9.8bn on debt interest payable which was inflated by the effect of the Retail Prices Index (RPI) on index-linked gilts.”
Meanwhile, analysts have described UK PMI data released on Tuesday as a slight “let-down”.
“We are once again witnessing a dichotomy between the performance of the manufacturing and services sectors. The manufacturing index slumped to its lowest level in four months (46.9) in May amid weaker global demand and headwinds related to Brexit. We note, however, that output in the UK’s dominant services sector continues to power ahead (55.1), in part due to a boost in hospitality from the King’s Coronation,” Matthew Ryan, head of market strategy at global financial services firm Ebury, said.
UK inflation data is also due out this week and will have subsequent implications for the Bank of England (BoE).
Official figures are expected to show the overall rate of inflation dropping, raising hopes that the quickest series of interest-rate increases in three decades is coming to an end.
Economists believe inflation will fall to between 8% and 8.5% from 10.1% in March.
Investors will also be looking for indications on the future outlook of US interest rate policy when the latest US Federal Minutes are released on Wednesday.
The latest US consumer spending data, the Personal Consumption Expenditures (PCE) price index, is also released this week — another gauge for inflation pressures.