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Last Week in the City: Fed and Delta variant spook markets

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook for the week ending 20 August 2021.

Last Week in the City: Fed and Delta variant spook markets
Garry white employee

by
Garry White

in Features

20.08.2021

Stock markets around the world fell sharply on Thursday, following comments from the US Federal Reserve on tapering asset purchases, the continuing spread of the Delta variant of Covid-19 combined with general growth concerns to end recent calm trading.

The US central bank indicated it may be on the brink of reducing its economic support for the US economy sooner than many in the market had expected. However, it issued more soothing words on interest rates. Most major global indices also remain close to record highs and the falls should be seen in context of the significant gains over the last year or so. 

Concerns about growth in China also accelerated, leading to a sharp fall in commodity prices. China’s economy sharply underperformed in July, with retail sales hit by new pandemic-related restrictions to curb the spread of the Delta variant. Flooding in central China and weak auto sales due to the ongoing microchip shortage also hurt its manufacturing output. Miners and energy companies listed in London tracked global commodity markets lower. Oil prices fell by about 5% over the week.

The FTSE 100 was down 2.4% over the week by mid-session on Friday but the more UK-focused FTSE 250 fared better, falling 0.8%.

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Covid-19

The US recorded more than 1,000 daily Covid-19 deaths for the first time since April as intensive care beds filled up in the five southern states with low vaccination rates. At least 90% of beds were occupied with critically ill patients in Florida, Georgia, Mississippi and Texas – while in Alabama they are full.

Israel, which has the world’s leading vaccination programme is now seeing the fourth wave of the Covid-19 virus, fuelled by the Delta variant. New infections have surged to the highest in six months, with signs that protection against severe disease has fallen significantly for elderly people vaccinated early this year. The government is now requiring anyone over the age of three to show proof of vaccination or a negative Covid-19 test before entering many indoor spaces. Government officials have even raised the prospect of another lockdown like in other waves.

A lockdown of Australia's largest city Sydney has been extended to the end of September as authorities struggle to contain a wave of Delta cases. The city's five million residents have been under stay-at-home orders since late June. Infections have more than doubled in the past week.

Economics

The minutes from the most recent US Federal Reserve meeting revealed that “most participants… judged that it could be appropriate to start reducing the pace of asset purchases this year”. This means America’s central bank will start pulling back some of the massive economic stimulus it introduced to deal with the pandemic earlier than expected – although no binding decision on when this will start was made. To ease market concerns, policymakers said this move on asset purchases did not mean that interest rates will be increased sooner than current expectations. However, markets reacted negatively.

The number of Americans filing new claims for unemployment benefits fell to a 17-month low, pointing to another month of robust job growth.

The UK’s inflation rate fell to 2% in the year to July as the economy continued to reopen. The Consumer Prices Index (CPI) fell from 2.5% in the year to June, which was its highest level for nearly three years. Inflation had been higher than the Bank of England’s 2% target for two months in a row, but the central bankers insist any spike in prices will prove temporary as economies fully reopen and bottlenecks in supply chains are resolved. The data appears to fit this narrative.  

UK government borrowing fell in July year-on-year, but the figure was the second-highest for July since records began. Government debt is now more than £2.2 trillion, or about 98.8% of GDP – a rate not seen since the early 1960s. However, it could have been worse – borrowing remains on track to come in well below the Office for Budget Responsibility’s forecast for the 2021-2022 financial year.

A Reuters’ poll indicated that market participants expect that the Bank of England will wait until 2023 before raising rates from a record low of 0.10%. However, economists noted there was a chance an increase may come sooner if inflation rises sharply or the economic recovery gathers pace.

Geopolitics

The International Monetary Fund (IMF) said Afghanistan will no longer be able to access the lender's resources following the Taliban's takeover of the country at the weekend. An IMF spokesperson said it was due to the "lack of clarity within the international community" over recognising a government in Afghanistan. Resources of over $370m (£268m) from the IMF had been set to arrive on 23 August.

The world waits to see if a Taliban government in Afghanistan will keep its new promises, but either way, it adds a further disruptive force to the region. We look at what the Taliban seizing power in Kabul means for investors here.

China's central bank and its banking and insurance watchdog said they had summoned executives of China Evergrande Group, the country's most indebted property developer, to a meeting. The two financial regulators urged Evergrande to keep operations stable, actively diffuse debt risks, and maintain the stability of the property market and financial markets, according to a joint statement from the People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC).

Growing economic nationalism means that continued disruption to trade and supply chains are going to be a feature of the investment backdrop. We look at what this means for investors here.

What now for India? The Indian stock market is looking expensive, so Narendra Modi must get on with his reforms to free the country’s economy. We look at the current situation here.

Mergers & acquisitions

M&A activity has increased significantly in recent weeks, with several UK companies agreeing to bids from US acquirers. Wm Morrison agreed a £7bn takeover by the US private-equity group Clayton, Dubilier & Rice (CD&R) in the latest round in a fierce fight for ownership of the country’s fourth-largest supermarket chain. The grocer confirmed it had accepted an improved offer of 285p per share from the private-equity firm that bettered the offer on the table from rival suitor Fortress. In June CD&R put Wm Morrison into play after it emerged its original 230p a share offer – worth £5.5bn – had been rejected on the basis that it “significantly undervalued” the retailer. Its new offer is a 60% premium to the share price on 18 June, the day before news of bid interest in the company was first made public.

Ultra Electronics, which supplies a raft of components to the Royal Navy, agreed to be bought by US-owned Cobham in a £2.6bn deal. Defence and aerospace company Cobham was formerly listed in the UK and was controversially bought by US private-equity firm Advent in 2019, despite national security concerns. Business Secretary Kwasi Kwarteng has instructed the Competition and Markets Authority to prepare a report on the takeover and said the UK was open for business. However, he added that foreign investment "must not threaten our national security". The deal is expected to ultimately be approved.

Aerospace and defence group Meggitt has received a potential 900p approach from another US company, TransDigm, after its board recently recommended an 800p-a-share offer from American group Parker Hannifin. Kevin Stein, chief executive of TransDigm, refused to discuss whether a formal offer would be made but responded to criticism of his company that has emerged since news of a potential offer broke. TransDigm promotes itself as delivering “private-equity like returns”, raising fears that it would asset-strip Meggitt. Mr Stein said: “We are not interested in buying companies and stripping them down. That is not our model – we buy to invest.”

Shares Deliveroo clawed their way back to their March IPO price for the first time since flotation. The stock has soared 71% since touching a bottom in April, bolstered by a favourable court ruling over the employment status of its drivers, a surge in sales and a big investment by peer Delivery Hero.

Technology

The US Federal Trade Commission (FTC) refiled its antitrust case against Facebook, arguing the company holds monopoly power in social networking. It was the second try by the FTC in its antitrust attack against Facebook. In June, a federal judge dismissed antitrust lawsuits brought against the tech giant by the agency and a broad coalition of state attorneys general. The court cited a lack of evidence that Facebook is actually a monopoly.

AutosToyota, the world's biggest carmaker, plans to slash worldwide vehicle production by 40% in September because of the global microchip shortage. Other manufacturers, including General Motors, Ford, Nissan, Daimler, BMW and Renault, have already scaled back production in the face of the global chip shortage. Volkswagen said it may have to reduce output further. Garry White looks at the political significance of the microchip industry here.

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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