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FTSE 100 hits pandemic high

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 15 October 2021.

| 12 min read

The FTSE 100 index hit its highest level since the market crashed at the start of the Covid-19 crisis in February last year, surpassing its previous pandemic peak seen in August. Gains in the oil price helped lift index heavyweights BP and Royal Dutch Shell, but also added to worries about inflation. One Federal Reserve official said the spike in inflation can no longer be called “transitory” and Goldman Sachs’ president said that, of all the risks, inflation was the one he feared the most.

The blue-chip index was up 1.7% over the week by mid-session on Friday with the more UK-focused FTSE 250 1.8% ahead.

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Covid-19

There was more optimism surrounding the travel industry after the UK announced new rules allowing holidaymakers returning to England to take lateral flow tests instead of more expensive PCR tests from 24 October. The government noted that the changes will take effect in time for families returning from half term breaks. Fully-vaccinated passengers will be told to upload photos of their Covid-19 tests for verification.

America is reopening its borders. The US will lift travel restrictions at its borders with Canada and Mexico starting in November for fully vaccinated travellers. The Biden administration recently said it would soon lift a similar sweeping restriction on foreigners looking to travel to the country from overseas. The lifting of the two bans next month will mark the reopening of the country to travel and tourism.

The number of Covid-19 cases in the UK is rising again, according to the latest government figures. More than 45,000 cases were reported on Thursday – the highest daily figure since July – and the total number of cases recorded in the previous seven days was up 13%.

Economics

The UK economy is almost back to its pre-pandemic level – but it may not be growing fast enough to meet the Bank of England’s target. After the removal of most social-distancing of restrictions on 19 July, the economy expanded 0.4% month-on-month in August. This means UK GDP is now just 0.8% below where its level of output just before the crisis took hold. However, the ONS said economic growth fell by 0.1% in July, downgrading its initial estimate of a 0.1% rise. The data implies that UK growth will miss the Bank of England’s target in the third quarter, which may reduce pressure for the central bank to raise interest rates.

Prices paid by US consumers rose by more than forecast in September, underscoring the persistence of inflationary pressures in the economy. The consumer price index (CPI) increased 0.4% from August, the Labor Department said. CPI rose 5.4% year-on-year, matching the largest annual gain since 2008. The pickup in price growth seen last month reflected higher food and shelter costs. However, measures of used cars and trucks, apparel and airfares cooled.

The International Monetary Fund (IMF) said it was worried that the global economic recovery had lost momentum, citing the delta variant of Covid-19, strained supply chains and accelerating inflation, especially food and fuel. The IMF is concerned about low-income nations, where access to vaccines remains limited. The IMF also trimmed its global growth forecast slightly this year, to 5.9%. However, the IMF expects most advanced economies to return to their pre-pandemic growth trends next year as supply chain issues ease – and to exceed it by about 1% in 2024.

The energy crisis could threaten the global economic recovery, and will also drive-up demand for oil, according to the International Energy Agency (IEA). In its latest monthly report, the IEA said that the surge in prices through the global energy chain is fuelling inflationary pressures, causing blackouts and could hurt growth. The higher energy prices are also adding to inflationary pressures that, along with power outages, could lead to lower industrial activity and a slowdown in the economic recovery.

The spike in inflation was expected to be short lived, but many central banks are now conceding that it may be higher for longer. We look at central-bank wobbles over inflation in this recent article

There are three distinct camps amongst today’s central banks – we look at the issues facing policymakers around the world.

China’s exports rose 28.1% to $305.7bn year-on-year in September, bouncing back from a weak comparable period last year. The figure was slightly higher than the 26% increase recorded in August, and better than economists’ expectation. Imports rose 17.6% to $240 billion, less than the previous month’s 33%.

UK Chancellor Rishi Sunak has been urged to cut business rates in the budget later this month to unlock billions of pounds of investment in the economy and ease the burden on companies. In a joint statement today ahead of the chancellor’s post-lockdown budget on 27 October, the Confederation of British Industry (CBI) and 41 other leading trade groups demanded fundamental changes to the system, which taxes companies based on the premises they occupy.

Supply chains

Shipping giant Maersk confirmed it was re-routing ships away from Felixstowe to other European ports, where smaller vessels will be used for UK deliveries. The UK's largest commercial port says the supply chain crisis has caused a logjam of shipping containers. The Port of Felixstowe, which handles 36% of the UK's freight container traffic, said the situation has been improving over the last few days. Maersk that some of its largest 20,000-container ships were waiting outside Felixstowe for between four to seven days.

Almost £1.5bn of goods being imported into the UK will be hit by shipping delays in the run-up to Christmas if the backlog at Felixstowe continues, an analysis by risk-modelling company Russell Group found. The study showed that clothes imports would be most affected, with retailers including Asda, Tesco, John Lewis and Marks & Spencer estimated to be among the most exposed businesses to the port disruption, as they import large amounts of clothing.

One of the UK's biggest toy retailers – The Entertainer – warned that delays at UK ports will result in shortages this Christmas. Chief executive Gary Grant said it would get harder to get stock to the right places at the right time. Barbie dolls and Paw Patrol toys are among the children's favourites he expects to run out fast.

Ikea warned the disruption to global supply chains will continue for at least another year. Chief executive Jesper Brodin said while there had been some improvement, there was still congestion at ports which has led to supply problems. "We need to live with disturbances for the year to come," he said. The owner of Poundland also predicted that pressure from supply chain problems will last into 2022.

The Port of Los Angeles in California will open 24 hours a day so it can handle more goods at night after a similar move by nearby Long Beach port. The ports – which handle 40% of all cargo containers entering the US – have faced months of queues in the Pacific Ocean.

In China, factory gate inflation hit its highest level in 26 years, as the global supply-chain squeeze continues. Chinese manufacturers hiked their prices by 10.7% year-on-year in September, as they passed on soaring commodity and energy prices onto their customers.

Commodities

Brent crude hit a three-year high on Friday above $85 a barrel, as rising demand and surging gas prices drive up the price of oil. West Texas Intermediate (WTI), the US benchmark oil price, hit a new seven-year high above $82 a barrel.

The European Union (EU) called for oil, coal and gas in the Arctic to stay in the ground. The bloc, which has three member states with Arctic territory, said there was a “geopolitical necessity” for it to be involved in the region, as global heating opens up competition for resources and the prospect of new shipping lanes. In a policy paper published, the European Commission promised to aim for “a multilateral legal obligation not to allow any further hydrocarbon reserve development in the Arctic or contiguous regions”, which would include a pact not to buy any fossil fuels that are developed.

We argue that governments are going to have to accept that, for this decade at least, they need to allow more gas exploration and development to see the world through the energy transition away from carbon in a recent article, Energy stresses mean more gas is required.

Geopolitics

China’s top agency in Hong Kong – The Liaison Office – gave the city’s leaders a to-do list with 500 policy demands, a sign of Beijing’s growing control in the Asian financial hub. The Liaison Office also said it planned to handle those tasks that relate to the functions of mainland authorities, such as cooperation with neighbouring cities in southern China, as well as the reopening of the border.

The EU agreed to drop most checks on supermarket goods arriving in Northern Ireland from Britain after days of rising tensions, however the UK government may not accept the deal. Britain’s Brexit negotiator Lord Frost had previously said the Northern Ireland protocol is not working – either in terms of its impact on trade or in terms of the hostility towards it from parts of the unionist population. The UK government has presented a new legal text for a new protocol that would cut the need for checks on goods travelling from Great Britain to Northern Ireland but will also minimise the role of the EU’s court in overseeing the agreement. On Friday, Lord Frost said there was still a long way to go to reach an agreement.

Technology

Recruitment group Hays reported strong growth in the first quarter of its financial year, with fees up 41% as labour shortages continue to bite the tech industry. Technology-sector recruitment accounts for more than a quarter of group fees and employers were paying out 7% more for new hires than in the same period last year.

Apple's shares were hit by reports that it could be forced to slash its iPhone 13 production targets due to the ongoing global computer chip shortage. The electronic giant had expected to make 90 million iPhones in the last quarter of 2021, but this could fall by 10 million units, the reports said. This has raised concern that the upcoming earnings season will be volatile as component shortages hit the sector.

Environmental, Social & Governance (ESG)

The Biden administration proposed rule changes that would make it easier for US retirement plans to add investment options based on ESG considerations – and make it possible for such options to be the default setting upon enrolment. In a reversal of a Trump-era policy, the Labor Department proposal makes clear that not only are retirement plan administrators permitted to consider such factors, but it may also be their duty to do so – particularly as the economic consequences of climate change continue to emerge.

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FTSE 100 hits pandemic high

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