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Fed hawkishness gives markets a jolt

Last Week in the City provides a round-up of the market movements and the global investing outlook. This covers week ending 7 January 2022.

| 8 min read

The minutes from the December meeting of the Federal Reserve’s policy-setting committee hit markets after they were interpreted as being more hawkish than expected. Concerns about the rate of US of interest-rate increases hit the technology sector, which is particularly interest-rate sensitive, and the US real-estate sector. In the first four days of trading this week the Nasdaq Composite lost 4.2%.

Nevertheless, UK large caps recorded gains. The blue-chip FTSE 100 index was up 0.7% over the week by mid-session on Friday, with the more UK-focused FTSE 250 down 1%.

What lies in store for markets and economies in 2022?

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.

Covid-19

The rules on testing for people travelling to England have been eased following requests from the travel industry, which has been hit by tighter regulations following the rise of Omicron. Fully vaccinated travellers are no longer required to take a test before they travel. From Sunday, rather than taking a PCR test on day two of arrival, they can take a cheaper lateral flow. The response from holidaymakers was immediate, according to the head of Jet2 Steve Heapy, who said demand for holidays returned to "around pre-Covid levels" after the testing rules for international travel were relaxed.

More cities in central China resorted to tough curbs as new Covid-19 infections in Henan province rose sharply

Australia's daily coronavirus infections soared to a new peak. About 50% of the country’s truck drivers are isolating due to Covid-19 protocols, putting Australia's supply chain under "significant pressure", the transport workers union said.

More cities in central China resorted to tough curbs as new Covid-19 infections in Henan province rose sharply. Authorities in the country are taking tough measures against small outbreaks ahead of the Winter Olympics and Lunar New Year peak travel season, which start in the next few weeks.

Hong Kong has banned flights from eight countries including the UK and US for two weeks over fears of a fifth wave of Covid-19 infections as part of its “zero-Covid” strategy. Cathay Pacific has suspended all long-haul cargo flights, prompting concerns about rising food prices in the former British territory. Hong Kong is reliant on food imports because of its limited agricultural land.

Economics

The minutes of the last Federal Reserve policy-setting meeting were decidedly hawkish. They indicated that members of the Federal Open Markets Committee (FOMC) meeting were ready to aggressively dial back pandemic assistance measures, in particular the central banks holdings of US government bonds. Members indicated that a reduction in the balance sheet is likely to start sometime after the central bank begins raising interest rates. The Fed is currently holding almost $8.3 trillion in US government bonds and mortgage-backed securities. It could start reducing its balance sheet in the next few months. The news sent bond yields high and equities lower, particularly technology stocks which are sensitive to tightening financial conditions. Markets currently expect the central bank to start raising its interest rates in March, which would mean that balance sheet reduction could start before the summer.

Growth across the UK services sector fell to a 10-month low, as the Omicron variant slowed the UK recovery. December was the worst month for the UK’s service economy since February 2021, in the last lockdown, according to data group IHS Markit. The UK services purchasing managers index (PMI) fell to 53.6 in December, from 58.5 in November. The figure remained above 50, however, which represents expansion.

In the EU, this year will see continued fiscal and monetary support for growth with some insouciance towards inflation. Next year may well see a sharp slowdown in total assistance and in growth. In Germany, the new government got together with apparent enthusiasm for power and for the compromises to achieve it. Keeping together a coalition of Greens, the SPD and Free Democrats will not be easy.

Geopolitics

The US and Japan voiced strong concern about China's growing might and agreed to work together against attempts to destabilise the region, including defence threats. In a joint statement after a virtual meeting of their foreign and defence ministers, the two allies noted deepening alarm about China – and increasing tensions over Taiwan – had put a greater focus on Japan’s security role. They expressed concerns that China's efforts "to undermine the rules-based order" presented "political, economic, military and technological challenges to the region and the world.”

Beijing fined and issued a warning to 7-Eleven over its website listing Taiwan as a country and displaying maps it said contained erroneous borders for Xinjiang and Tibet.

Indonesia announced a ban on coal exports in January. to avoid outages at its own power plants

Commodities

Indonesia, the world's top exporter of thermal coal used in power stations and China's largest overseas supplier, announced a ban on coal exports in January to avoid outages at its own power plants, sending coal prices in the region surging. China, India, Japan and South Korea together received 73% of Indonesian coal exports in 2021.

Retail

Next had a good Christmas but said rising costs would result in price rises across its ranges this year. Increasing wages plus higher shipping and manufacturing costs means it will raise prices for its spring and summer ranges by 3.7%, while it expects a 6% increase for its autumn and winter goods. Management raised its profit guidance for the full year, following a 20% rise in sales in the Christmas quarter compared with 2019.

Britain’s biggest bakery chain Greggs raised its full-year guidance and said its sales last year exceeded pre-pandemic levels. Greggs also said it had raised prices by between 5p and 10p on items across its range of sausage rolls and cakes due to rising costs.

Discount retailer B&M raised its profit guidance following strong festive trading. Full-year profits are now set to come in at between £605m to £625m, ahead of the £578m previously expected.

Boots’ US-owner Walgreens Boots Alliance said it has beaten market expectations in its latest quarter after strong trading in its UK business. The pharmacy group said it will raise its financial guidance for 2022 as a result.

Tesco outperformed its major rivals during the Christmas period, achieving its highest grocery market share since January 2018, according to data from market researcher Kantar. However, Tesco's grocery sales over the 12 weeks to 26 December slipped by 0.9% year-on-year after sales soared in lockdown during Christmas 2020, but on a two-year basis its sales were up 10.1%. J Sainsbury, Asda and Wm Morrison saw sales slip by 4.4%, 3.9% and 6.5% respectively over the 12-week period compared with 2020.

The UK car industry says growing demand for electric cars was the only "bright spot" for the sector in 2021.

Environmental, Social and Governance (ESG)

The UK car industry says growing demand for electric cars was the only "bright spot" for the sector in 2021 as a string of pandemic-related challenges combined to hit sales. The Society of Motor Manufacturers and Traders (SMMT) trade body reported a rise of just 1% in overall new car sales during 2021 compared to the previous 12 months. However, more electric vehicles were registered than in the previous five years combined. One in four cars sold in the UK in December were battery operated but represented 11.6% of sales over the year. Sales were held back by the global semiconductor shortages, which meant fewer models were available and also drove up second-hand car prices last year.

Technology

Samsung Electronics expects to post a 52% jump in profit for the last three months of 2021, amid a global microchip shortage. The world's biggest memory chip maker estimates that it made 13.8tn won (£8.5bn) in the period. This represents its highest fourth quarter operating profit in four years for the South Korean company.

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Fed hawkishness gives markets a jolt

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