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Last Week in the City: Evergrande increases challenges for Beijing

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook for the week ending 17 September 2021.

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook for the week ending 17 September 2021.
Garry white employee

by
Garry White

in Features

17.09.2021

A significant credit market event may be brewing in China. Evergrande, which has a big position in the provision of housing for better-off Chinese citizens and has branched out in a range of property and industrial activities, may be about to default on debt as it struggles to service $305bn of borrowings.

The high price of natural gas is also impacting some industries, with two fertilizer plants in the UK closing following sharp rises in costs since the spring. The price of steelmaking ingredient iron ore continued to slump, as China’s steel output falls.

The FTSE 100 was down 0.25% over the week by mid-session on Friday with the more UK-focused FTSE 250 up 0.01%.

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Covid-19

Vaccine-induced immunity is likely highest shortly after people get their recommended two doses of the vaccine and starts to drop afterwards, a new study from Covid-19 shot maker Moderna suggests. This appears to bolster the case for a third booster shot. Pfizer has also noted that protection from its vaccine wanes over time. US authorities are meeting on Friday to consider whether to recommend a booster shot.

Shares in airlines and holiday companies such as easyJet and Tui rallied following reports that the UK government was poised to ease England’s Covid-19 rules for international travel. The government is expected to reduce the number of countries on the “red list” – the highest level of alert for international travel which means returning travellers must spend 11 nights in hotel quarantine at a cost of £2,285 – and may scrap the expensive requirement for Covid-19 testing for double-vaccinated travellers returning to the UK. No announcement had been made by mid-session on Friday.

Economics

Reports suggested that UK Chancellor of the Exchequer Rishi Sunak plans to use next month’s Budget to set out rules to rein in government borrowing, amid fears that a rise in interest rates could blow a hole in public finances.

UK inflation jumped to 3.2%, the highest figure in almost a decade, pushed up by higher food and restaurant prices, but the Office for National Statistics said the rise was likely to be temporary. However, inflation is set to head even higher to 4.5% or maybe even 5% by Christmas, before slowing sharply next year, economists said.

Retail sales in the UK fell for the fourth month in a row in August. Sales fell by 0.9% month-on-month, following a 2.8% fall in July. Economists had expected a 0.5% rise. Food store sales fell by 1.2%, but this was a result of the removal of restrictions on hospitality leading to more people eating out. 

US retail sales unexpectedly increased in August, likely boosted by back-to-school shopping and child tax credit payments from the government, which could temper expectations for a sharp slowdown in economic growth in the third quarter.

It looks likely that the US government and central bank will continue with their “running-hot” experiment for some time to come. But could the economy run too hot? We take a look here.

Geopolitics

China has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade organisation. This was originally set up by the US to counter China's influence, but former President Donald Trump pulled the US out of the pact in 2017.

The move followed the announcement earlier in the week of an historic security deal between the US, UK and Australia. Beijing interpreted the move as an effort to counter China and accused the three countries of having a "Cold War mentality". The Aukus pact will see the US and UK give Australia the technology to build nuclear-powered submarines, which has upset France which had agreed to build new submarines for Australia.

Chinese property group Evergrande is once again warning that it could default on its more than $300bn as it struggles to cut costs or find anyone to buy some of its assets. Should that happen, the effects would be felt across China's banking system and the wider economy. We take a look at Beijing’s trouble with Evergrande and rising political tensions here.

Opposition activists in Russia accused Alphabet's Google and Apple of caving into Kremlin pressure after they removed an anti-government tactical voting app from their stores on the first day of a parliamentary election. The app, designed by allies of jailed Kremlin critic Alexei Navalny, gives people detailed recommendations on who to vote for in an effort to thwart the electoral chances of the ruling United Russia party which supports President Vladimir Putin.

Environmental Social and Governance (ESG)

China’s view was there could no special relationship with the US and the West on climate change all the time China was subject to what she sees as provocations over Taiwan, the South China Sea, technology trade and other matters. We look at how China and the US find agreement difficult on net zero here.

Commodities

Mining shares were weak after the iron-ore price continued to slump, falling below $100 a tonne. The price of the steel-making ingredient has tumbled by more than half in four months after reaching record highs.

Soaring gas prices have forced the closure of two large UK fertiliser plants, sparking warnings of a looming shortage of ammonium nitrate that could hit food supplies, according to the Financial Times. CIF Industries Holdings said it did not have an estimate of when production would restart at its two UK plants. Norway’s Yara also said it would reduce production of fertiliser. Wholesale prices for natural gas have more than doubled since the spring and are at record highs in some major European markets.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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