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Everyone’s talking inflation

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 25 June 2021.

| 15 min read

Last Week in the City

Inflation looks set to remain at the centre of investors’ attention for many months to come, with worries and concerns over policy error increasing volatility in equity and bond markets. Federal Reserve chair Jerome Powell resolutely stuck to his guns, arguing that the coming price rises – caused by manufacturing bottlenecks, trade-route disruptions and other pandemic-related factors – will rapidly ease and the economy gets back to top speed.

Mr Powell insists he can run the economy “hot”, with inflation left to rise above its 2% target. He thinks this will make up for the period of below-target inflation in the recovery from the financial crisis. Western governments want to see average inflation of around 2% because it is regarded as the “sweet spot”. A bit of inflation – and the expectation that it will continue – helps to stimulate activity. It encourages people to spend – which helps boost the economy and generate jobs. When there are falling prices, this often encourages people to delay purchases so they can grab a bargain in the future. This is very damaging for an economy as demand falls.

The inflation debate is also likely to get more fractious, with Republicans now attempting to blame rising inflation on President Biden’s $1.9 trillion Covid-19 economic relief package as a core part of their strategy to retake the House of Representatives at next year’s mid-term elections

The FTSE 100 rose 1.4% over the week and the FTSE 250 was up 0.7% by mid-session on Friday.

Charles Stanley Radio

Half-year market update: In this episode, hear our Chief Global Strategist and Chief Investment Officer discuss the current investment landscape.

Investing themes

Covid-19

UK prime minister Boris Johnson confirmed the much-telegraphed news that there will be a four-week delay before most of England’s anti-pandemic restrictions come to an end. The rapid spread of the Delta variant of the Covid-19 infection has caused a spike in cases and the government has accelerated its vaccination programme, including to younger people. The delay in the so-called “Freedom Day” will allow for a greater proportion of the population to receive vaccines.

This delay was another blow for the embattled travel, hospitality and leisure sectors, but there was some potentially good news too. Transport Secretary Grant Shapps said the government planned to drop quarantine for fully vaccinated people returning from amber list countries "later in the summer". The UK government will also expand its green travel list of countries where infection rates are so low, no quarantine is required on return. Six destinations will also be added to the government's red list, where travel is to be avoided. The changes will take effect from 30 June. Travel-industry groups expressed surprise that destinations such as the Canary Islands and the Greek Islands were not included in the green list.

Green-list additions

  • Europe: The Balearic Islands (which include Ibiza, Menorca, Majorca and Formentera), Malta and Madeira
  • Caribbean: Anguilla, Antigua and Barbuda, Barbados, British Virgin Islands, Cayman Islands, Dominica, Grenada, Montserrat and Turks and Caicos Islands
  • Other British Overseas Territories: Bermuda, British Antarctic Territory, British Indian Ocean Territory and Pitcairn

Red-list additions

  • Dominican Republic, Eritrea, Haiti, Mongolia, Tunisia and Uganda.

Economics

The Bank of England expects the strength of Britain’s economic recovery will push inflation above 3% by the end of the year, as it eases alongside the post-Covid-19 boom in 2022. Members of the central bank’s monetary policy committee (MPC) said the Bank’s base rate should remain at 0.1% until the economic outlook was more certain. Interest rates were left unchanged. Concerns about too much inflation created by the stimulus-fuelled recovery has been dogging markets for recent months. Bank of England policymakers have been no exception and have also come under pressure to signal when interest rates will rise in response to rising prices.

Over in the US, Federal Reserve chair Jerome Powell reiterated his stance that that current price increases will likely prove temporary. US consumer-price rises hit their highest level in thirteen years in May and Republicans are attempting to blame rising inflation on President Joe Biden’s $1.9 trillion Covid-19 economic relief package as part of their strategy to retake the House of Representatives at next year’s mid-term elections. Nevertheless, Mr Powell acknowledged that “these effects have been larger than we expected – and they may turn out to be more persistent than we expected.” Fed policymakers indicated that they expected interest rates would rise from record lows sometime in 2023, updating an earlier forecast that indicated that rate rises were not on the cards until 2024. This week we looked at the fed’s evolving view on inflation.

The world’s central banks are walking a difficult tightrope as they attempt to usher damaged economies into the post-pandemic world. But with the world running so hot, will even the most powerful central bankers be able to maintain control? We ask whether interest rates may rise sooner than feared in our recent article.

The huge amount of borrowing over the past year to deal with the pandemic has resulted in UK government debt ballooning to almost £2.2 trillion. This constitutes about 99.2% of GDP – a level of borrowing not seen since the early 1960s. The Office for National Statistics (ONS) now estimates that the government borrowed a total of £299.2bn in the financial year to March. While that was down by £1.1bn from its previous estimate, it remains the highest level since the end of World War Two.

The reopening of the economy has, however, boosted UK tax receipts. Most tax receipt categories rose in May compared with the same month a year ago: VAT receipts were up 23% year-on-year; fuel-duty receipts more than doubled; and stamp-duty receipts on land and property sales was almost 90% higher, although the stamp duty holiday extension means buyers in England, Wales and Northern Ireland avoided paying tax on at least some of their purchase.

UK manufacturing output grew at the fastest rate since records began in the 1970s, according to the Confederation of British Industry (CBI). The balance of companies reporting higher output volumes surged to +37 this month, with around 52% seeing an increase and just 16% a decrease. That shows the fastest growth since the survey began in July 1975 and is up from +18 in the last report issued in May. However, the CBI also noted that costs are rising. Around 48% of businesses surveyed expected to raise output prices over the next quarter, while just 2% predicted a cut. That gives a balance of +46, the strongest expectations since January 1982.

Geopolitics

The UK formally started negotiations to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – an 11-nation trans-Pacific trading bloc. Joining the CPTPP, whose members include Canada, Japan, Mexico and Australia, is a “glittering post-Brexit” prize, International Trade Secretary Liz Truss said. Joining the CPTPP would make it easier for financial and professional services firms to sell into new markets, the UK’s Department for International Trade has indicated.

Australia has escalated its wine dispute with China. Canberra confirmed it will file a formal complaint with the World Trade Organisation (WTO) after Beijing imposed up to 218% tariffs on its wine last year. China says the tariffs were increased because of trading malpractice, which Australia denies. It is part of a wider dispute between the countries after Australia called for an investigation into the origins of Covid-19 in Wuhan.

Beijing continued its moves to cement its power in the South China Sea. Taiwan pulled back all but one staff member from its Hong Kong trade office after they refused to sign a commitment to the one-China principle required for visa renewals. The office acts as Taiwan’s diplomatic presence in the former British colony. Taiwan said the Hong Kong government had “repeatedly imposed unreasonable political conditions on the visa applications”. This has included a requirement since 2018 that staff sign a commitment to Beijing’s one-China principle, which includes the claim that Taiwan is a part of China. “As a result, our staff cannot continue to stay and continue their posts,” the council said. Garry White looks at why Taiwan’s semiconductor industry increases the country strategic significance in the South China Sea in his recent article, The political significance of the microchip industry.

The wealth gap between countries in the European Union means the cost of the bloc’s rush to a ‘green’ economy may increasingly fall on unimpressed German taxpayers. We look at the political problems resulting from the EU’s two-speed economy here.

Initial public offerings (IPOs)

Online bathroom retailer Victorian Plumbing became the biggest-ever float on London’s junior market. The group was valued at about £850m in its Alternative Investment Market (Aim) IPO and the shares surged by a fifth on their first day of dealings.

One of the many options that can be used to mitigate Inheritance Tax is investing in shares listed on the Aim that qualify for Business Relief. Once Business Relief qualifying assets are held for a minimum of two years, they are exempt from Inheritance Tax providing they are still held at the time of death. Discover how AIM can help your children by reading our recent article.

Environment, Social and Governance (ESG)

Microsoft and Alphabet are pushing back against calls to include disclosures on ESG issues in US regulatory filings – particularly the 10k filing, which is essentially a group’s annual report. The Securities and Exchange Commission (SEC) is planning to make ESG disclosures mandatory and is currently consulting on how this should be done. Pimco, Invesco and other large asset managers want ESG information to be included in the 10k, but the technology companies told the regulator that they disagree. ESG information should not be included as information in these filings would open them up to potential legal risks, since such data is subject to more uncertainty than the detailed financials and risk disclosures that are currently required in this document, the technology behemoths told the SEC.

Are you looking to make a difference through Responsible Investing? Does Responsible Investing mean giving up returns? How does Responsible Investing impact the real world? Read our free guide here, which seeks to inform you on how your investments could do more than make you money.

Mining and commodities

Currency markets continued to impact commodities, as recent strength in the dollar continued to act as a headwind. The US currency rose after the Fed brought forward its expectations of the date of the next US interest-rate rise. Because commodities such as oil, copper and wheat are priced in dollars, the world’s reserve currency, a rising greenback makes commodities more expensive for buyers in other currencies – and it can therefore put a cap on demand. This partly explains why, in general, commodity prices and the dollar have an inverse relationship.

China’s National Food & Strategic Reserves Administration announced its intention to sell 20,000 tonnes of copper in an initial batch of sales of state metal reserves. The move is part of attempts by China, the world’s largest consumer of metals, to cool a steep rally in commodity prices that has squeezed manufacturers’ margins.

Technology

The EU opened an antitrust probe into whether Google’s online advertising technology operations have violated EU competition rules. The Alphabet-owned search engine will see a formal antitrust investigation that will examine whether Google has hurt rival advertising technology firms, advertisers and online publishers by favouring its own online display advertising technology services, in what’s known as the “ad tech” supply chain. Brussels’ competition chief, executive vice-president Margrethe Vestager, says the EU was concerned that Google has made it harder for rivals in the online ad services sector to compete.

Alphabet’s Google decided not to reopen its London campus for start-ups, which formed part of the capital’s “mini–Silicon Valley”, saying it will offer services online instead. The Covid-19 pandemic and shift to working from home is likely to have resulted in the closure. “This shift demonstrated that, similar to the support we provide in other advanced start-up ecosystems like the US and Germany, we can provide support for start-ups right across the country without a physical space,” Google said.

Property

Two big players in the leasehold sector have agreed to change the way they operate following an investigation by the competition watchdog. Housebuilder Persimmon will allow its leaseholders to buy the freehold of their property at a discount. Insurance company Aviva, which buys leaseholds from house builders, will repay homeowners who saw their ground rents double. The Competition and Markets Authority said the commitments were a "real win".

The pandemic has left the UK property sector in a state of flux. The retail sector continues to suffer, with further rent cuts likely. But the rise in online shopping is boosting warehouse owners. We look at how industrial property is leading a patchy real-estate recovery.

Healthcare

GlaxoSmithKline’s (GSK) management team hosted a strategy day which provided more colour on its future dividend, as well as a detailed update on ‘New GSK’ as the split of the drugs giants into two businesses in 2022 remains on track. The ‘New GSK’ will become a biopharma company with an R&D approach focused on science related to the immune system, the use of genetics and new technologies. There will also be a separate Consumer Healthcare business, which manufactures products ranging from Aquafresh toothpaste and Panadol painkillers to Zovirax cold-sore cream and much more. ‘New GSK’ is expected to deliver a step-change in growth and performance over the next ten years, driven by high-quality Vaccines and Specialty Medicines portfolio and late-stage pipeline, management said.

Retail

Shares in Wm Morrison surged more than 30% on Monday, after it rebuffed a £5.5bn takeover offer from a US private-equity group Clayton, Dubilier & Rice. The supermarket giant said the 230p-a-share cash offer “significantly undervalued Morrisons and its future prospects”. CD&R had offered to pay 230p a share in cash. Morrisons’ share price closed at 178.45p on the prior Friday and the news sparked some speculation of a potential bidding war.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Everyone’s talking inflation

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