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Central banks take aggressive action

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 17 June 2022.

| 8 min read

US equities entered a bear market on Monday amid rumours the Federal Reserve was planning an interest rate rise of 0.75% to deal with runaway inflation – which reached 8.6% in May. The rumours proved correct – and the US central bank made its first 75-basis-point increase in the Fed Funds rate since 1994. The Dow Jones Industrial Average tumbled below 30,000 points for the first time since January 2021.

The Bank of England Rates increased its benchmark interest rate from 1% to 1.25%, the fifth consecutive rise, which brought UK rates to their highest level in 13 years. The central bank also warned that UK inflation could rise as high as 11% before abating. The Swiss National Bank also raised its policy rate for the first time in 15 years – topping forecasts with a 0.5 percentage point increase.

Over the week, the blue-chip FTSE 100 index was 3.0% lower by mid-session on Friday, with the more UK-focused FTSE 250 also down by 3.3%.

Podcasts

How high will inflation go? In our latest episode of Charles Stanley Radio, Chief Investment Commentator Garry White and Chief Global Strategist John Redwood discuss whether inflation is reaching its peak.

Ukraine and commodities

Russia earned $197bn from oil and gas exports during the first 100 days of the war in Ukraine, according to the independent Centre for Research on Energy and Clean Air (CREA). It said revenues have been falling since March, as many countries shunned Russian supplies, but remain high. The European Union made up 61% of these exports.

The war in Ukraine is transforming the outlook for the supply, demand and price of hydrocarbons and the pace and cost of the energy transition, according to Wood Mackenzie. The energy research and consultancy said that, while the precise timing and implementation of future bans on Russian commodity imports are difficult to predict, a rewriting of energy trade flows is now underway. It noted that the outlook for liquified natural gas (LNG) had been boosted significantly. A huge increase in LNG project investment is being supported by a rapid increase in European LNG demand, with US developers already looking to fill the space, Wood Mackenzie noted.

Economics

The US Federal Reserve raised interest rates by 0.75 percentage points, higher than the level members of its voting committee were guiding markets before its media black?? period two weeks ago. Rates were also increased by the Bank of England and the Swiss central bank. Inflation now appears to be central banks primary concern, above asset valuations and economic growth. Markets can only resume a bullish trend when it is clear inflation has peaked in the US and when it is possible to see an end to rate rises.

Food prices will quickly rise this summer, the Institute of Grocery Distribution (IGD) has said.

Wages in the UK are falling at the fastest rate in more than a decade when taking inflation into account, the Office for National Statistics has said. Between February and April, pay excluding bonuses was down 2.2% year-on-year when rising prices are considered. However, pay including bonuses is outpacing price rises, rising by 0.4% when factoring in inflation.

Food prices will quickly rise this summer, the Institute of Grocery Distribution (IGD) has said. Prices will rise at a rate of 15% as households pay more for staples such as bread, meat, dairy and fruit and vegetables. It also predicted that prices would rise faster for longer than Bank of England estimates. The IGD, which provides analysis to major grocers, said the UK was facing the highest cost of living pressures since the 1970s, mainly caused by Russia’s war in Ukraine.

China’s economy improved slightly in May, bouncing back from strict pandemic-related lockdowns. Official data released by the National Bureau of Statistics showed an uptick (0.7%) in factory production and a smaller decline in retail sales, which were down 6.7% following an 11.1% slump in April.

There are worries about the way interest rates for borrowing over longer time periods were rising sharply for some countries in the Euro. The ECB held an emergency meeting this week to reinforce its support for stability.

Covid-19

UK Covid-19 cases have risen for the first time in two months. The spike is likely to be caused by increases in cases compatible with the original Omicron variant BA.1 and the newer variants BA.4 and BA.5, the Office for National Statistics said. A total of 989,800 people in private households are estimated to have had the virus last week – up from 953,900 the previous week. It is the first time that total infections have risen week-on-week since the end of March, when the number hit a record 4.9 million at the peak of the Omicron BA.2 wave.

Geopolitics

The EU announced new legal action against the UK government over its plans to scrap parts of the post-Brexit deal for Northern Ireland. On Monday, the UK outlined a bill aimed at unilaterally changing trade, tax and governance arrangements in the 2019 Northern Ireland Protocol. The UK argued that the Protocol had disrupted trade and power-sharing in Northern Ireland, but the EU said overriding parts of the deal would break international law. Prime Minister Boris Johnson's spokesperson said his government was disappointed the EU had taken legal action and continued to favour a negotiated resolution.

In Geneva, the new Director General of the World Trade Organisation, Ngozi Okonjo-Iweala, did her best to energise and repurpose the organisation. Nevertheless, an unfinished agenda from past years remains.

Travel

Gatwick Airport is cutting the number of flights each day during the peak summer months due to continuing staff shortages after travellers were hit by cancellations and delays at UK airports. The number of daily flights will be cut to 825 in July and 850 in August, down from 900 in previous years. The government and regulators recently told airlines to ensure their summer timetables were "deliverable".

Environmental, social & governance (ESG) investing

Motoring and car industry groups criticised the UK government's decision to end grants worth £1,500 towards buying electric cars. The Department for Transport said the plug-in subsidy scheme was being closed with immediate effect. It said funding would now be "refocussed" towards improving electric vehicle charging.

Technology

Technology shares continued to bear the brunt of falls, as the sector relies heavily on borrowing and the cost of debt is rising sharply. The Nasdaq Composite index fell 9.4% between Monday and Thursday.

Amazon says it will begin delivering parcels to shoppers by drone for the first time later this year, pending final regulatory approval. A trial will take place in the Californian town of Lockeford before it is rolled out more widely. The online retail behemoth has promised drone delivery for years but has faced delays and setbacks.

Shares in Tesla fell after Elon Musk’s electric-vehicle group unveiled price increases to deal with rising costs. The electric carmaker's autopilot features are also under scrutiny by US road safety regulators.

Mr Musk repeated his threat to walk away from his $44bn bid for Twitter if he is not given data about fake accounts. He also hinted at potential job cuts if his takeover bid for the social-media company proved successful.

Online music group Spotify also saw steep falls in its valuation after the streaming giant said it was slowing hiring in the face of economic uncertainty.

Corporate news

Cosmetics maker Revlon has filed for Chapter 11 bankruptcy protection in the US, blaming supply-chain disruptions that had driven up the cost of raw materials for its products. The 90-year-old company said it has also been struggling with supplier payments and labour shortages.

Online fashion group Asos warned that full-year profits will fall sharply as customers are returning more items as inflation squeezes disposable income. The company expects adjusted pre-tax profit to fall to between £20m to £60m. This compared with management’s January guidance of between £110m and £140m and the £193.6m in profit reported last year.

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Central banks take aggressive action

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