The Bank of England became the world's first major central bank to raise interest rates since the pandemic started in early 2020, a move that the market did not expect. The news came hot on the heels of a policy change from the Federal Reserve. The US central bank accelerated its tapering of asset purchases – and the programme will now wrap up in the first quarter. This allows interest rates to start being increased shortly after.
Central bankers more aggressive stance against inflation comes amid the continued rise of the Omicron strain of Covid-19, the persistence of the Delta variant and continuing supply-chain disruption. US technology majors fell following the Federal Reserve’s change in its quantitative-easing policy. Tech stocks are valued on the prospect of future growth, which will be hit by higher borrowing costs, so the sector is particularly sensitive to a tightening of financial conditions. THE Nasdaq 100 fell 1.8% in the first four trading days of the week.
The blue-chip FTSE 100 index was down 0.4% over the week by mid-session on Friday, with the more UK-focused FTSE 250 falling 1.2%.
Podcast: We need to talk about investing Episode 6: The Rise of 'Finfluencers'. In this episode, Erica and Rob talk about social media influencers active in finance.
The UK has reported its highest number of positive daily Covid-19 tests since the pandemic began – and England's chief medical officer, Professor Chris Whitty, warned that infections could soon reach a level that will exceed testing capacity. Professor Whitty said the Omicron variant was moving at a “phenomenal” pace and that case numbers would continue to hit new highs. About 20% of new UK infections are now of the Omicron variant. However, on Friday, reports suggested that cases in the South African region at the centre of the Omicron outbreak, Gauteng, showed signs of slowing down. These reports were unconfirmed. As a result of the surge in the UK infection rate, France will tighten restrictions on travel from Britain significantly, effectively banning all non-essential journeys.
- 6% The proportion of China's GDP generated in Covid-hit Zhejiang.
EU countries are facing a new wave of infections from both the Delta and Omicron variants, as they head into the winter holidays. The European Centre for Disease Prevention and Control this week also warned that the overall risk Omicron poses to public health in Europe was “very high.”
Numerous companies have suspended operations in one of China's biggest manufacturing hubs as local authorities try to contain a Covid-19 outbreak, halting production of goods for export from a region that generates 6% of China’s GDP. Reuters reported at least 20 listed companies shut operations in virus-hit areas in Zhejiang, with tens of thousands of residents in quarantine. A government spokesman said the outbreak in three cities – Ningbo, Shaoxing and Hangzhou – was developing at a "relatively-rapid" speed.
A number of trade organisations and businesses criticised the tightening of pandemic restrictions in the UK. The rise of the Omicron variant has already caused shoppers to be more cautious, with the number of shopper numbers across the country falling 1.1% in the week to 11 December 11, driven by a 2.7% fall in activity on the country’s high streets, market researcher Springboard said. Electronics retailer Currys warned of weakening trading in the run-up to Christmas as the Omicron variant of Covid hits demand. But the retailer said it was "riding out" the challenges, with the technology market now “sustainably larger” than it was before the pandemic.
Discount pub chain JD Wetherspoon issued a first-half profit warning, blaming what it called “arbitrary” Covid-19 rule changes by the UK government.
The Bank of England warned inflation was likely to hit 6% in April. This is three times its target level of 2%.
The travel industry is likely to be hard hit once more by pandemic rule changes. In a letter to Boris Johnson, the chief executives of seven travel companies – including Ryanair and IAG-owned British Airways – accused him of breaking his promises to scrap PCR tests after they were introduced once more. Bosses of the UK unit of Tui, easyJet, Loganair, Virgin Atlantic, Jet2 and trade group Airlines UK also signed the letter. Gyms called for “urgent financial packages” to support businesses as working from home guidelines threaten the crucial January sign-up period for city-centre fitness centres reliant on commuter footfall. Attendance is starting to fall already as Omicron prompts more people to be cautious ahead of Christmas. The Treasury said it was providing enough business support, including a recovery loan scheme, VAT relief, protection and a grant scheme, but it was keeping the situation “under review”.
Germany, worried about both inflation and Covid-19, may soon have a government that will need to act to tackle the underlying problems.
The Bank of England became the world's first major central bank to raise interest rates since the pandemic started in early 2020 – as it warned inflation was likely to hit 6% in April. This is three times its target level of 2%. The central bank said it had to act now, despite the emergence of Omicron, because the rate-setting Monetary Policy Committee saw warning signs in underlying inflation pressures. The nine-member MPC voted 8-1 to raise rates to 0.25% from 0.1%, with external member Silvana Tenreyro voting against the increase.
This followed another hawkish move earlier in the week by the Federal Reserve. The US central bank has accelerated its tapering of asset purchases – and the programme will now wrap up in the first quarter, which allow for rates to start rising shortly after. With the so-called “dot plots” in the minutes of the most-recent Federal Reserve meeting forecasting three rate hikes next year among the majority of policymakers.
The European Central Bank (ECB) said it will reduce its bond purchases further but vowed to continue its unprecedented monetary policy support for the euro zone economy into 2022. ECB President Christine Lagarde reiterated previous comments that the “conditions to raise rates are very unlikely to be satisfied next year.” The ECB left its benchmark refinancing rate unchanged at 0%.
There are now more people working and appearing on payrolls in the UK than prior to the pandemic.
There was some positive data supporting the Bank of England’s hawkish turn. November saw clothing sales recover to pre-pandemic levels, helped by Black Friday sales, and the UK jobs market remains strong. Total UK retail sales rose by 1.4% last month. but sales of clothing rose 2.9% and were 3.2% higher than February 2020. There are now more people working and appearing on payrolls in the UK than prior to the pandemic. UK unemployment fell as employers continued to hire staff despite the end of the furlough scheme. The jobless rate edged down to 4.2% from 4.3%.
Under pressure from President Recep Tayyip Erdogan, Turkey’s central bank defied conventional economic theory and cut interest rates again – despite soaring inflation and an accelerating currency crisis. The central banks cut borrowing costs for the fourth straight month and the lira fell to a record low following the announcement.
US Secretary of State Antony Blinken promoted his government’s strategy to deepen its Asian treaty alliances, offering to boost defence and intelligence work with partners in the Indo-Pacific region. On a visit to Indonesia, Mr Blinken called the Indo-Pacific the world's most dynamic region, where everyone had a stake in ensuring a status quo that was without coercion and intimidation, which was aimed at Beijing.
Russian President Vladimir Putin told Boris Johnson that members of the NATO military alliance were threatening Russia by expanding activity in Ukraine, according to a statement from the Kremlin. US intelligence agencies believe Russia could be planning an invasion of Ukraine, but Russia has denied any such plans.
The UK signed a free-trade deal with Australia which the British government described as the first post-Brexit deal negotiated from scratch.
The UK signed a free-trade deal with Australia which the British government described as the first post-Brexit deal negotiated from scratch and not "rolled over" from trade terms that the UK enjoyed while in the EU. Whitehall estimated it would unlock £10.4bn of additional trade – while ending tariffs on all UK exports.
Four views of the world: The world, by population, is now an Asian-led planet. But if you examine the world through the prism of the stock market, wealth generated and military capability a different story emerges.
Oil prices were slightly lower week-on-week at Friday lunchtime, as surging cases of the Omicron sparked fears new restrictions to control its spread may hit fuel demand. A weaker dollar supported commodity markets broadly. Because commodities such as oil, copper and wheat are priced in the world’s reserve currency, a falling dollar makes commodities cheaper for buyers in other currencies – and vice versa.
The poster child of China's property crisis, Evergrande, was officially declared in default by credit rating agency S&P Global after the heavily indebted conglomerate missed a bond payment earlier this month.
Environmental, Social & Governance (ESG)
HSBC said it expected all its clients to have a plan in place to exit the thermal coal industry by the end of 2023. Coal is contentious for governments across Asia, where the bank mainly operates, as it is cheap and widely used in the region but needs to be reined in to cut emissions in the fight against climate change.
The hawkish policy shift from the Federal Reserve hit tech stocks in the US hard.
Whilst much of the world economy has recovered well from the intense lockdowns of the second quarter of 2020, car output remains well below the level seen in 2018 – and even the lower output figures of 2019. Consumers are confused about which type of car to buy as regulations change to meet net zero-targets.
The hawkish policy shift from the Federal Reserve hit tech stocks in the US hard. Valuations of tech companies are particularly sensitive to interest rates, as their value is based on the prospect of future growth, which is diminished by higher borrowing costs. An environment of rising interest rates is therefore a headwind for the sector.
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