US debt downgrade spooks global markets and Taylor Wimpey surprises on the upside

“There is a saying that when the US sneezes, the rest of the world catches a cold. That is certainly true with how the US government’s credit rating downgrade has troubled markets globally,” says Laith Khalaf, head of investment analysis at AJ Bell.

“Ratings agency Fitch lowered the rating from the top level of AAA to AA+ amid concerns about the country’s finances and its debt burden. In effect, this is saying the US is now higher risk than previously thought. The news took markets by surprise, sending Asian and European indices down by approximately 1%.

“When the debt of the world’s largest economy is seen as lower quality, it will naturally trouble investors and make them rethink their portfolios. It also might surprise some people given how the US economy is proving to be more resilient than expected.

“There were only six stocks in positive territory on the FTSE 100. BAE Systems jumped 4.7% after upgrading forecasts on rising military spend. Taylor Wimpey’s results contained nuggets of good news, helping to lift its shares along with sector peers Barratt Developments and Berkeley. Convatec moved higher after it lifted full-year guidance, while BP benefitted from ongoing strength in the price of oil.

“Brent Crude advanced 0.6% to $85.45, meaning the commodity price has now risen by 18% since the end of June amid signs of tightening supply.”

Taylor Wimpey

“The housebuilding sector could do with some good news given widespread concerns about the state of the property market and the fact many people can no longer afford to buy a home.

“Taylor Wimpey has come to the rescue, saying it has completed more home builds than expected and is guiding for full year completions to be at the upper end of previous guidance. Naturally its share price jumped on the news.

“The positive situation on completions helped to offset a sharp drop in profit margins for Taylor Wimpey as it built fewer homes than a year ago and dealt with build cost inflation. Fortunately, cost inflation is starting to ease.

“The industry faces a conundrum – plenty of people want to buy a house, but sadly the sharp jump in mortgage costs is blocking them from achieving that dream.

“On top of this, Taylor Wimpey says the planning system remains ‘extremely challenging’ and could negatively impact the supply of homes across the industry in the future.

“This leaves the UK in the same situation as before: too much demand versus supply. In theory that should be supportive for house prices over the longer term.”

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