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A calm week in stock markets

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 27 May 2022.

| 8 min read

Unpicking the frenetic market action of recent weeks. Equity markets rallied this week, with the Dow Jones industrial average looking set to break an eight-week losing streak. The S&P 500 and Nasdaq were also on track to break a seven-week series of losses. Gains in the three major US indices followed heavy losses in the prior week, with US markets enduring their worst week since the start of the Covid-19 pandemic.

Global stock markets are not expected to see any meaningful rally until an improvement is seen in numerous issues, including the war in Ukraine and the Covid-19 crisis in China. Investors need to be confident that the peak in inflation has passed, fearing a period of economically-damaging stagflation. However, some relatively positive US corporate earnings and a clear Federal Reserve policy brought a degree of calm to equity markets – albeit amid continuing global tensions.

This week, the blue-chip FTSE 100 index was up 2.5% by mid-session on Friday, with the more UK-focused FTSE 250 also up 2.5%.

Unpicking the frenetic market action of recent weeks: In our latest podcast, Chief Investment Commentator Garry White and Chief Global Strategist John Redwood discuss the recent market gyrations.

Ukraine

To help the country break its heavy reliance on Russian gas, an energy partnership between Germany and the US was announced at a meeting on the side lines of the G7 meeting on climate issues. The deal includes plans to expand offshore wind power generation and co-operation on using hydrogen in industrial production. Could hydrogen be the missing link needed for decarbonisation?

Russia's central bank slashed interest rates to 11% and said it saw room for more cuts this year. Inflation is slowing and the economy is heading towards a contraction. The central bank has been gradually reversing an emergency rate hike to 20% in late February that was triggered by Russia's invasion of Ukraine and the imposition of Western sanctions in response.

There have been “no significant” merchant ship movements through Odessa.

The cost of a weekly shop is rising at its fastest rate since 2009, according to Kantar. Grocery prices were up 7% in the past four weeks year-on-year and, perhaps unsurprisingly, the market-research group also said food prices were now the second most important concern to families after soaring energy bills.

There have been “no significant” merchant ship movements through Odessa, a huge port on the Black Sea, since the start of the Ukraine invasion at the end of February. There have been repeated warnings that millions of people face starvation if grain exports from Ukraine do not restart. Markets and governments need to now adjust to a world of food shortages and high prices.

Representatives of the Group of Seven (G7) countries met to try and keep ambitious climate goals on track following the supply issues and cost increases caused by sanctions imposed as a result of Russia’s war. Senior officials from the G7 countries are holding a three-day meeting in Berlin during which they will seek to agree on common targets for the shift from fossil fuels to renewable energy.

Chancellor Rishi Sunak announced a “temporary” windfall tax on oil majors’ “excess” profits of 25%, but this can be offset by incentives to invest in clean energy. Mr Sunak did not include renewable companies in the tax grab – a possibility that was first raised in the Financial Times earlier in the week. The story was potentially placed by government sources attempting to test the market reaction to such a move. Unsurprisingly, markets reacted negatively to the proposals and the sector had a volatile week. Shares in sector-related companies and investment trusts fell following the initial report but rallied following the statement in the House of Commons. Mr Sunak said he was also “urgently evaluating” the scale of excess profits made by electricity generators.

China and Covid-19

Chinese Premier Li Keqiang conceded that China’s economy was suffering greatly from Beijing’s “zero-Covid” policy, which still sees entire mega-cities put into strict lockdown. During a meeting of officials to deal with the economic situation, he admitted that GDP growth this year is likely to miss the Communist Party’s 5.5% economic growth target for 2022. Consensus forecasts currently stand around 4.5%, so this was generally expected – but it is the first time Beijing has admitted this is likely. Mr Li said a realistic target for the year’s second quarter was simply to get the economy back on a growth trajectory. He also called on officials to make sure the unemployment rate falls after it climbed to 6.1% in April – the highest since February 2020.

Beijing offered more than 140 billion yuan ($16.7bn) in additional tax relief, which will be mainly aimed at businesses as it seeks to offset the heavy impact of coronavirus lockdowns on the economy.

Economics

Equity markets added to gains following the release of the most-recent meeting of the Federal Reserve’s rate-setting Open Markets Committee. Policymakers unanimously felt the US economy was very strong as they attempt to rein in inflation without triggering a recession. The Fed raised interest rates by 50 basis points at its May meeting, the biggest increase in 22 years. Most of the committee’s members judged that further rate hikes would “likely be appropriate” at its upcoming June and July meetings. Investors were reassured by the uniformity of opinion and lack of uncertainty about what needs to be done in the short term.

UK government borrowing was lower than expected in April, although the figure was still the fourth-largest total for the month since records began. The difference between government spending and tax income was £18.6bn, down £5.6bn from April last year. The Office for National Statistics also cut its estimate for borrowing during the previous financial year by £7.2bn to £144.6bn, although this was still the third-highest financial year borrowing total since records began in 1947.

Geopolitics

Further cracks appeared in the west’s relationship with China and Russia after the two nations vetoed tougher United Nations sanctions against North Korea following a US effort to punish Pyongyang for testing an intercontinental ballistic missile. The resolution had the support of the 13 other members of the Security Council.

A delayed World Economic Forum at Davos in Switzerland aims to get the move towards net zero back on track.

BT Group revealed that the government will examine French billionaire Patrick Drahi's increased stake in the company over national security concerns. The National Security and Investment Act 2021 (NSIA) came into force on 4 January this year and applies to any acquisition of material influence in a company or the acquisition or control over assets. Mr Drahi's company, Altice, increased its investment from 12% to 18% in December, prompting speculation the company could face a takeover bid. BT is in the middle of a transformational programme to build a national broadband fibre network, a strategy crucial both to the company and the government.

A delayed World Economic Forum at Davos in Switzerland aims to get the move towards net zero back on track and – and rescue globalisation from current western tensions with Russia and China. But the elite have questions to answer.

Environmental, social & governance (ESG)

Asset management giant Vanguard will continue investing in fossil fuel companies despite its commitment to “hit net zero across its portfolio” by 2050. The world’s second-largest asset manager said it was committed to shielding its clients from climate risks but would not pull back from fresh investment into coal, oil and natural gas companies. “Our duty is to maximise long-term total returns for clients. Climate change is a material risk, but it is only one factor in an investment decision,” chief executive Mortimer Buckley said.

Mergers & acquisitions

Twitter investors are suing Elon Musk and the social media platform over the handling of the billionaire's $44bn offer. The lawsuit accuses the Tesla boss of "wrongful conduct" as his "false statements and market manipulation have created 'chaos' at Twitter's headquarters in San Francisco". It also claimed that several tweets posted by Mr Musk were "misleading".

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A calm week in stock markets

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