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Digital coins join technology slump

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 13 May 2022.

| 12 min read

Global markets had another turbulent week with technology giants once again at the vanguard of the falls. The Nasdaq Composite fell 6% between Monday and Thursday, bringing its loss in the year up to 28%. The world’s five largest technology companies have shed about $2.6 trillion in value since the start of the year.

There was also a major rout in the cryptocurrency markets, with “Cryptocrash” one of the leading topics on social-media sites. Many so-called “stablecoins” lost their peg to the dollar – with one losing 98% overnight.

The UK economy contracted over the month of March, but the GDP reading for the first quarter is still showing growth of 0.8%. However, fears of a slowdown are mounting

The sharp US equity moves at the start of May followed a period of reflection on recent hawkish statements from the Federal Reserve about its plans to curb inflation. It was a reminder that markets do not like slowdowns generated by tightening by central banks.

This week, the blue-chip FTSE 100 index was 1.1% lower by mid-session on Friday, with the more UK-focused FTSE 250 down 4.0%.

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Ukraine and energy

Pressure on Europe to secure alternative gas supplies increased as gas prices surged after Moscow imposed sanctions on European subsidiaries of state-owned Gazprom. These included Gazprom Germania, an energy trading, storage and transmission business that Germany placed under trusteeship last month to secure supplies. Germany said some subsidiaries of Gazprom Germania were receiving no gas because of the sanctions. Moscow has already cut off supply to Bulgaria and Poland.

Ukraine suspended the flow of some Russian natural gas to Europe, blaming Moscow for its actions. The Ukrainian gas transmission system operator (GTSOU) said it had decided to suspend operations at a major transit point because of “interference by the occupying forces”. The Sokhranivka measuring station handles as much as 32.6 million cubic meters per day, or about a third of the Russian gas that flows via Ukraine to Europe.

Saudi Aramco overtook Apple as the world’s most valuable listed company.

A windfall tax on big oil and gas companies such as BP and Shell to help deal with the cost-of-living crisis has not been ruled out by Chancellor Rishi Sunak, press reports suggested. Mr Sunak was said to be still open to the idea if companies do not reinvest their bumper profits in the UK. At its AGM, BP promised to invest all its profits from its North Sea oil and gas production over the next decade back into the UK in what was seen as an attempt to quell calls for the tax grab.

Saudi Aramco overtook Apple as the world’s most valuable listed company, boosted by a surge in oil prices. The rising price of energy is stoking inflation, which is responsible for an expected series of interest-rate rises that has led to the sharp sell-off in technology stocks.

Energy giant Shell has agreed to sell more than 400 of its petrol stations in Russia to the country's second-largest oil producer, Lukoil. Its Shell Neft subsidiary will be sold for an undisclosed sum.

Covid-19

Shanghai is still in lockdown under Beijing’s “zero-Covid” strategy – and the harsh restrictions are causing increasing disruption to businesses. Toyota said it will suspend operations at more production lines at its factories in Japan due to a shortage of parts caused by the situation. Tesla has also reportedly halted most production at its Shanghai plant due to problems with sourcing parts.

In the UK, the number of people with Covid-19 in hospital in England fell to its lowest level since Christmas. A total of 7,034 patients were in hospital as of 8am on 11 May, down 21% week-on-week, according to NHS England.

The White House said the US has passed the grim milestone of more than one million Covid-related deaths. It is the highest official total in the world – although the World Health Organisation believes the true death toll may be much higher elsewhere.

Economics

One swallow does not a summer make, but there was some bright news on inflation from the US. The rate of price increases eased slightly last month, as costs for petrol, used cars and clothing slipped. US Inflation printed at 8.30%, less than the previous month's 8.50%, but slightly more than the 8.10% median forecast by markets. The cost of groceries, housing and items such as airline tickets continued to rise, with inflation remaining near a 40-year high.

The UK economy contracted by 0.1% in March, as high inflation crimped demand and people cut back on spending. The monthly figure compares with no growth in February and 0.7% growth in January. The outcome for the first quarter was an expansion of 0.8%, down from 1.3% in the October-to-December quarter of 2021.

The US Senate finally confirmed Jerome Powell to his second four-year term as head of the Federal Reserve.

Geopolitics

Russia’s continuing war in Ukraine has prompted more explicit warnings in China about Moscow’s value as a diplomatic partner, in an apparent sign of growing unease over President Xi Jinping’s strategic embrace of Vladimir Putin. Russia was headed for defeat and “significantly weakened” by the conflict, former Chinese ambassador to Ukraine Gao Yusheng said in remarks widely circulated online.

Both China and Russia claim to be upholders of the global rules-based international order, but they now have a very different interpretation of those rules to Western democracies. The blowback from Vladimir’s Putin’s invasion of Ukraine will be significant and two recent errors from Chinese President Xi Jinping could have a long-lasting global impact.

Cryptocurrency

As equity markets fall and risk aversion grows, investors are seeking safe havens in assets such as the old-fashioned dollar, which continues to strengthen. However, the value of digital currencies has slumped. The Bitcoin price fell below $31,000, less than half of what it was at its peak in November 2021. The value of the Terra Luna “stablecoin” collapsed 98% overnight. Stablecoins are supposed to be pegged to the dollar. Tether, the most popular stablecoin, also fell off its US-dollar peg to hit an all-time low. Terra was the third largest before its collapse. The combined market value of all cryptocurrencies is now reportedly $1.12 trillion, about a third of its November value, with more than 35% of that loss coming in the last few days.

Mergers & acquisitions

Supermarket group Morrisons won a bidding war for McColl's, the convenience store and newsagent chain. McColl's was put into administration by PwC on Monday and immediately garnered interested from the supermarket group and others including EG Group, the petrol-station empire owned by the billionaire Issa brothers.

Capital & Counties Properties and Shaftesbury said they were in advanced talks on a merger that would create a central London property giant. Shaftesbury would own 53% and Capco shareholders the remainder in a deal structured as an acquisition of Shaftesbury by Capco. Two other real-estate investment trusts (REITs) reached a merger agreement – LXi REIT and Secure Income REIT.

easyJet plans to remove seats on some of its planes this summer, so that it can operate flights with fewer cabin crew.

Tobacco behemoth Phillip Morris said it was making a $16bn cash offer for Swedish Match, which has been recommended by the Stockholm-based group’s board. Swedish Match controls nearly half the world's share of both the nicotine pouch and snus markets. It is also the fourth-largest producer of US-style moist snuff, a category that is currently led by Altria.

HomeServe shares jumped following a report that Canadian investment group Brookfield Asset Management was nearing a takeover of the household-repairs provider. Speculation indicates a price of about $$5bn, which would be the UK’s largest public-to-private deal this year.

Travel

There were more positive statements from the travel industry, which is slowly recovering from the Covid-19 disruption that brought the global industry to a halt. Package-holiday giant Tui said it expected summer bookings to "almost reach" 2019 levels this year. The company’s chief executive also warned customers that there will be no last-minute low-price deals amid strong demand and high fuel costs.

Short-haul carrier easyJet plans to remove seats on some of its planes this summer, so that it can operate flights with fewer cabin crew. Management said that staff shortages mean it will take out the back row of seating on its A319 fleet, so it can fly with three cabin crew instead of four. That would limit numbers on board to a maximum of 150 passengers, according to Civil Aviation Authority regulations.

Managers of Luton Airport underscored the strength of the ongoing travel industry recovery after they revealed 1.2 million passengers had passed through its gates in April, compared with just 106,000 in April 2021.

Other corporate news

This season’s corporate trend in fast fashion is likely to see more retailers charge customers who return items purchased online. Inditex-owned Zara will now charge shoppers £1.95 for online returns, with the cost taken from their refund. However, items bought online can still be returned for free in physical stores. Uniqlo and Next already charge for online returns. Online shopping boomed in pandemic lockdowns, but customers are more likely to return items bought online than in store, raising costs for retailers and eating into margins.

Twitter confirmed that two of its senior executives are leaving in one of the biggest shake-ups since Elon Musk agreed to buy the company. The executives had been leading the social-media group’s consumer and revenue operations. The group has also paused most hiring, except for "business critical roles". Mr Musk, the multi-billionaire Tesla founder, is in the process of a $44bn takeover of the platform.

ITV warned an advertising slump is likely in the coming months because of “macroeconomic and geopolitical uncertainty” and the absence of a major commercial event such as last year’s European football championship. Nevertheless, the broadcaster said it has a “robust” start to the year, having grown TV and digital advertising revenues by 16% year-on-year in the first three months.

BT Group shares rose after it agreed to form a new sports joint venture with Warner Bros Discovery in the UK and Ireland. BT confirmed the deal as it also reported that trading is “on the right track” despite a slip in revenues for the past year. This follows a lengthy review of its BT Sport operation in which numerous potential sales of the unit fell through.

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Digital coins join technology slump

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