Market report: China woos consumers, but defence contractors knocked by uncertainty
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’Markets are in choppy waters at the start of a week dominated by central bank decisions, as investors navigate risky trade currents and geopolitical uncertainty. Hopes that a new consumer life raft in China will buoy up the country’s prospects of recovery have helped lift sentiment slightly, but caution remains. The multi-pronged approach to boost consumption across China’s vast economy has been long-awaited. Authorities plan to stimulate domestic demand by raising the minimum wage, helping with re-skilling and providing unemployment insurance. It’s also trying to shift habits away from a squirrel-like savings culture by offering more support to pensioners and students, to try and encourage more spending. Plans to stabilise the flailing property sector, and measures to support stock market participation are also part of the picture. The details of the special action plan come as latest economic snapshots show improvements in the January and February period, with retail sales rising 4%, and growth in industrial output coming in at 5.9% year on year beating forecasts. With the prospects for China looking a little more positive, it’s helped push up oil prices, amid expectations of higher demand for energy in the country. While it’s clearly encouraging that the economy is showing signs of resilience, gains have been limited, given the expectation that China will suffer the strains of trade wars erupting.
Defence contractors are on the back foot after a disappointing update from Qinetiq, which specialises in advanced materials, cyber capabilities and analytics. There have been high hopes that the pledge from European nations to swell military budgets amid heightened geopolitical tensions would translate into a flurry of new contracts. But as alliances shape shift, the uncertainty has been more of a curse than a blessing. Qinetiq has been best with contract delays, not just for its US arm, but also its UK intelligence business. It’s undergoing a re-evaluation and restructuring of its US business to help revive growth. Lay-offs at the US defense department may exacerbate its current problems, given that its short-term contracts in the US which appear to have already been hit hard. It seems spending decisions are being delayed amid the uncertainty. The current issues are expected to cause a £30 million hit to the bottom line, and while longer-term opportunities appear more secure, shareholders are waking up to the fact that there may be volatile trading conditions for some time to come.
Eyes will be on crucial central bank decisions this week, but a wait and see mood is percolating, amid the drip-drip of uncertainty surrounding prospects for the global economy. The Bank of Japan, the Fed and the Bank of England are all set to keep interest rates on hold. Growth is also being put high on the agenda of the UK government, especially given the disappointing reading on Friday showing a contraction in output in January. But the desire to be prudent with the public finances and not break fiscal rules means the government is in a tight spot. Spending cuts are on the cards with welfare reform set to be at the heart of changes. Given just how elusive growth is in the UK right now and concerns that it will be hide away for longer given trade headwinds, the Bank of England is expected to embark on multiple rate cuts from May onwards. But patience will be needed from consumers and businesses hoping for a faster cut to borrowing costs.
Trade nervousness is set to keep Wall Street on edge, as investors assess the Fed’s decision amid bleaker prospects for the economy, and plummeting consumer confidence. The University of Michigan consumer sentiment reading dropped to 57.9 in March 2025, from 64.7 in February and the lowest since November 2022. But, given previous statements about the need for caution and evidence that the fall in inflation is being sustained, the Fed is still unlikely to cut interest rates on Wednesday. Nevertheless, the financial markets are pricing in fresh reductions from June onwards and will be clinging onto Chair Jerome Powell’s words for any hints about how many cuts there could be in quick succession.
Gold is hovering near fresh records as geopolitical tensions and trade concerns keep up demand for the safe-haven asset. US strikes have been continuing against Yemen’s Houthi’s, who have been attacking ships in the Red Sea. Concerns that the prospects for a ceasefire in Ukraine has diminished have also added to uncertainty. Bulk buying by central banks have also kept gold prices elevated, with China in particular continuing its acquisitional spree. Brent Crude, Bitcoin and other crypto assets are staying volatile amid the highly uncertain economic climate. The crypto world is intwined with investor sentiment and movements on equity markets and so remain highly sensitive to falls in confidence.’’