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BoE officials signal imminent rate rise

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 22 October 2021.

| 10 min read

Officials from the Bank of England signalled that an interest rate raise was likely soon – with one saying there would be a “live” discussion about rate rises at its next meeting on 4 November. Unilever underscored the inflationary environment by saying cost increases meant it had put up prices of its consumer goods by an average of 4%.

UK Covid-19 infections continued to rise, prompting calls for more restrictions to be introduced, but the government dismissed these calls. On Thursday, the number of reported Covid cases rose above 50,000 for the first time since July, taking the seven-day average to 46,791 cases per day. Health Secretary Sajid Javid said cases could climb as high as 100,000 per day over winter.

The blue-chip FTSE 100 index was down 0.2% over the week by mid-session on Friday with the more UK-focused FTSE 250 0.1% lower.

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Covid-19

Concerns mounted over rising UK Covid-19 cases. Cases have been regularly over 40,000 a day in the last week – with the high numbers mainly being attributed to infections among schoolchildren. Downing Street said that the winter months looked potentially “challenging” and that it was keeping a “close watch” on cases. The government is resistant to reintroducing any pandemic restrictions currently.

A subvariant of the Delta variant of Covid-19 that is growing in England – designated AY.4.2 – is being monitored but is not likely to change the overall pandemic picture, Oxford Vaccine Group chief Andrew Pollard said.

A former director of the World Health Organisation, Professor Anthony Costello, claimed that the UK had the highest Covid-19 case rates in the world – and a death rate far higher than China.

Morocco banned flights to and from the UK due to the rise in Covid-19 infections until further notice. Flights between Morocco and Germany and the Netherlands have also been suspended.

Qantas Airways said it will speed up plans to restart flights to many destinations and use some bigger planes amid "massive demand" for international flying as quarantine restrictions ease for Australian citizens.

Economics

Inflation remained a central market concern and UK interest rates are clearly going to rise soon. Bank of England governor Andrew Bailey said the Monetary Policy Committee “will have to act” as rising inflation looks set to be less transitory than previously expected. The Bank’s new chief economist Huw Pill warned that UK inflation is likely to hit or surpass 5% by early next year. He said the central bank will have a "live" decision to make at its next interest-rate-setting meeting on 4 November. The benchmark UK interest rate has been at a historic low of 0.1% since March 2020.

Food and Drink Federation chief executive Ian Wright told MPs that inflation is running between 14%-18% for hospitality companies. The price rises for ingredients are likely to result in price rises for consumers, he said. PG Tips and Dove soap maker Unilever said it had already starting to increase its prices by an average of 4% due to higher costs.

Inflation is not as transitory as central banks had hoped – what happens now?

Concerns about the UK recovery were stoked after UK retail sales dropped by 0.2% in September, worse than economists' expectations of a monthly rise of 0.5% and the fifth consecutive month of falls.

China's economy grew 4.9% year-on-year in the July to September quarter, the slowest rate in a year and worse than analysts had forecast. This was far slower than the previous quarter when growth was almost 8%, suggesting the recovery in the Asian powerhouse is weakening. Power shortages, outbreaks of Covid-19 and pressure from Beijing on a number of industries are slowing down the nation’s growth.

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COP26/Environmental, Social & Governance (ESG)

The UK set out its long-awaited plans to cut greenhouse gas emissions ahead of the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow between 31 October –and 12 November. Boris Johnson has pledged to cut emissions by 78% by 2035, compared with 1990 levels. The proposals did not include any mention promoting less meat eating, as many campaigners had hoped. They included:

  • Homeowners grant of up to £5,000 to install low-carbon heat pumps to replace gas boilers.
  • Grants of £620m for electric vehicles and street charging points.
  • A further £120m to develop SMRs - small "modular" nuclear reactors that can be factory-built
  • A mandate for carmakers to sell a proportion of clean vehicles each year.
  • An extra £350m to help the automotive supply chain move to electric components.
  • An extra £625m for tree-planting and peat restoration.
  • Grants of £140m to two clusters of companies promoting carbon capture and storage to produce hydrogen. Heavy industries in these areas will be fuelled by hydrogen split from natural gas. The resulting CO2 emissions will be pumped into undersea rocks for storage.

At COP26 leaders from around the world will meet to discuss how to minimise global temperature rises caused by human activity. It is unclear whether China's President Xi Jinping will attend. The Asian nation is the world’s largest polluter.

Miner Rio Tinto announced a $7.5bn plan to reduce carbon emissions by 50% by 2030, a reduction three times greater than its previous target. This target is also more ambitious than rival BHP Group, which is targeting a 30% reduction by 2030.

Nearly one in five vehicles sold in the European Union in the third quarter was an electrified model, according to the European Automobile Manufacturers' Association.

Geopolitics

The US would come to Taiwan's defence and has a commitment to defend the island Chinese claims as its own territory, US President Joe Biden said. However, a White House spokesman later said his remarks did not signify a change in policy.

Joe Biden backed away from his flagship tax increases to fund planned infrastructure and social spending. The US president said he was close to striking a deal to pass major spending measures after weeks of intraparty bickering among his fellow Democrats. However, he said that raising corporate tax rates, one of his most oft-cited promises, was unlikely to be part of the legislation.

At least 13 phone companies around the world have been compromised since 2019 by sophisticated hackers, believed to come from China. The roaming hackers – known as LightBasin – were able to “search and find” individual mobile phones and “target accordingly”, according to intelligence group CrowdStrike. Hackers were also able to obtain personal subscriber information held by phone companies and metadata showing who made and received calls.

European elections: The EU may find France less enthusiastic than before on green issues as the right in France pushes the conversation in a different direction in the election campaign.

Commodities

Oil prices fell following China’s moves to intervene in its coal market and after a forecast of a mild US winter hit demand expectations. Winter weather in much of the US is expected to be warmer than average, according to a National Oceanic and Atmospheric Administration. China's thermal coal futures fell about 30% over the week, after Beijing said it would intervene to cool surging prices of the commodity to help electricity producers out of a widespread power crunch. Benchmark Brent crude futures were slightly lower over the week by mid-session on Friday – following six weeks of gains.

Property

Embattled Chinese property giant Evergrande may have avoided default – for now. Its shares rose in Hong Kong trading on Friday after Chinese media reported it had made an interest payment before a crucial deadline. The over-borrowed group missed an $83.5m payment last month, triggering a 30-day grace period which was set to expire on Saturday 23 October. Had the deadline been missed, Evergrande would have plunged into formal default. Earlier in the week, news that a deal to sell part of its property services operations had fallen through sent its shares plunging again.

The wider problems faced by the Chinese property market resulted in China's new home prices stalling in September for the first time since February 2020. The average new home price in 70 major Chinese cities was unchanged in September month-on-month, compared with 0.2% growth in August, according to data released by the National Bureau of Statistics.

Technology

Facebook unveiled a plan to hire 10,000 people in the European Union to develop a “metaverse”. A metaverse is an online world where people can game, work and communicate in a virtual environment, often using virtual reality headsets. Facebook chief executive Mark Zuckerberg has been a leading voice on the concept.

Cryptocurrencies

Bitcoin prices hit an all-time high after the first US bitcoin futures-based exchange-traded fund (ETF) began trading. The ProShares Bitcoin Strategy ETF saw about $1bn worth of shares trading hands on its first day of dealing.

Retail

Tesco is taking on Amazon. The UK’s biggest grocer opened its first checkout-free store in Holborn, central London – where people can shop without having to scan a product. The store – a new format called GetGo – has been converted to allow customers to shop and pay without using a checkout. This follows similar stores opened by Amazon.

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BoE officials signal imminent rate rise

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BoE officials signal imminent rate rise
By Garry White
Senior Editor
22 Oct 2021 | 10 min read