Bill Jamieson: Are we heading for an autumn market downturn?

For more than a year financial pundits have been warning of a market correction. One was widely forecast in the aftermath of the EU referendum. But instead the market quickly recovered, helped by the fall in sterling.

Bill Jamieson asks: 'Is this just a summer squall, or the start of a more serious correction?' Picture: Daniel Leal-Olivas/AFP/Getty Images
Bill Jamieson asks: 'Is this just a summer squall, or the start of a more serious correction?' Picture: Daniel Leal-Olivas/AFP/Getty Images

The FTSE 100 index went on to hit a record high of 6,547.63. The FTSE 250 Index, reflecting the performance of medium-sized companies more dependent on the UK economy, also joined in the rally. At the start of the year there was another wave of cautionary premonitions. These, too, were brushed aside.

Then came terrorist attacks, the general election, a hung parliament, a hamstrung Queen’s Speech, inflation hitting 2.9 per cent and evident doubts about growth momentum in the economy.

Now a toppy-looking FTSE 100 has started to reflect the headwinds and in particular the weakness of the consumer sector, which has long been the key driver of growth.

Inflation is running well ahead of pay growth, household savings have been run down to near record lows and the average household has unsecured debt of more than £13,0000 as we struggle to maintain living standards. Bank of England numbers showed households racked up an extra £1.6 billion in consumer debt in March, up by more than 10 per cent compared with the same month a year earlier.

Little wonder, given the huge political and economic uncertainties that have crowded in over the past two weeks, that markets have turned down.

Last Friday the FTSE 100 closed at 7,312.72, down 235 points from its high. This is the worst monthly loss since early 2016. Is this just a summer squall, an all-too-typical seasonal weakness during the summer months, or the start of a more serious correction?

The weakness of the retail sector reflects the challenging picture for sales growth given the pressure on household budgets. This dark picture is compounded by two developments. The first is the confusion over official monetary policy – the need to keep interest rates low to maintain

confidence and activity and prevent the economy slowing further versus the need to slow the rate of household debt. In recent weeks there have been conflicting signals from the Bank.

The second is apprehension over a big sell-off across the consumer sector. The weekend brought reports that hedge funds have bet more than £3bn against the UK’s biggest retail names. Shares in leading retailers such as Marks & Spencer,

Debenhams, Morrisons, Ocado and Pets at Home are five of the ten most-shorted stocks on the London market. Marks & Spencer suffered a 2.1 per cent fall at the end of last week, JD Sports was down 3.9 per cent and Next weakened by 3 per cent.

The weakness is by no means confined to retail and companies in the consumer durables sector. Elsewhere market stalwarts such as BP (down 1.4 per cent) and Shell (down 1.1 per cent) edged towards the bottom of the FTSE 100 as a lacklustre month drew to a close. A particular weak spot was the water utilities sector. United Utilities was the biggest faller, down 2.6 per cent at 875p after a downgrade from analysts at Credit Suisse, capping a woeful month for the stock, down 13 per cent in June and well south of the £10.50 peak at the start of the year.

Utilities were among the worst performing stocks in the FTSE 100 last month against a backdrop of political pressure during the general election. National Grid is down 12 per cent over the month while Severn Trent has lost 11 per cent. Lower bond yields had sent valuations climbing to near all-time highs, but now come tougher price controls with little room left for further falls in finance costs.

As for the notable weakness in the shares of the oil giants, this was in the wake of a downgrading by Merrill Lynch to “underperform,” reflecting concern over the oil price remaining “range-bound” at around $47 a barrel. Meanwhile, sterling was weighed down by confirmation of UK economic growth of just 0.2 per cent in the first quarter, according to the ONS.

All this may prove to be no more than a minor adjustment that will run its course. But they may be the first tremors of a more serious correction of the type that normally occurs in the autumn – often turbulent as dealers return from the summer break and assess the prospects for 2018.

Given the likelihood of renewed political turbulence and threats to the government’s fragile majority, the market weakness of the past ten days may be the harbinger of a deeper and more widespread downturn.