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Optimism returns & oil prices soar

Your round-up of the market movements and the global investing outlook for the week ending 27 August 2021.

| 8 min read

Last week in the city

The oil price jumped more than 10% this week as markets shook off recent tapering concerns and as energy companies began shutting-in production in the Gulf of Mexico ahead of a potential hurricane that is expected to hit the region this weekend.

Despite signs that the spread of the Delta variant is crimping global growth, investors regained their confidence in the recovery. US corporate earnings hit an all-time high in the second quarter and the US jobs market is continuing to improve, one of the most important factors underpinning the recovery.

  • up 0.5% FTSE 100
  • 0.9% ahead FTSE 250

The FTSE 100 was up 0.5% over the week by mid-session on Friday with the more UK-focused FTSE 250 0.9% ahead.

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Covid-19

Cases of Covid-19 in the UK continue to rise, fuelled by the Delta variant, but the relationship between cases and deaths remains very different to how it was this time last year because of the success of the vaccination programme.

Australia's new daily cases of Covid-19 topped 1,000 on Thursday for the first time since the global pandemic began, as two major hospitals in Sydney set up emergency outdoor tents to help deal with a rise in patients. New Zealand, which has so far handled the pandemic well, is also seeing cases rising, with 70 infections reported on Friday. Its lockdown was extended.

As airline travel tentatively recovers from the pandemic, British Airways is considering the creation of a new short-haul subsidiary operating out of Gatwick. The IAG-owned carrier was forced to move its short-haul services from Gatwick to London Heathrow when the pandemic struck last year. However, a new operation dedicated to short journeys could allow the carrier to compete with low-cost rivals such as Ryanair and easyJet until its long-haul services return in full.

US technology giant Apple delayed recalling staff to the office until January at the earliest amid fears over surging Covid-19 cases.

Economics

US corporate profits surged to a fresh record high in the second quarter, boosted by robust demand and higher prices, the US Department of Commerce confirmed. This was despite businesses facing increased costs owing to shortages of raw materials and labour.

The US economy grew slightly faster in the second quarter than previously estimated, but not by as much as some in the market had expected. GDP rose at a revised 6.6% annualised rate in the period, up from its initial reading of 6.5%.

How much longer the reputable central banks of the main economies can carry on creating extra money without it causing a general inflation? We take a look here.

Growth across the UK’s private sector slowed to a six-month low in August, according to data researcher IHS Markit’s monthly survey of purchasing managers at UK companies. Businesses in the services and manufacturing sectors reported that activity had been hit by staff shortages, escalating shipping costs and shortages of raw materials, leading to “intense” price pressures. This pulled IHS Markit/CIPS flash composite PMI down sharply, to 55.3 in August from 59.2 in July. We argue that trade interruptions are here to stay.

In Australia, private sector output is shrinking at a faster rate this month, hit by new lockdowns as the Delta variant of the virus spreads. In Japan, factory activity growth slowed in August, while the services sector shrank at its fastest rate since May 2020. Growth across France’s private sector also slowed to a four-month low and in Germany there was a slight slowdown in growth, but surveys showed it continued to recover strongly. However, business activity in the wider Eurozone continued to grow at one of the strongest rates seen in the past two decades during August, with job creation matching July’s 21-year high.

The annual central banker meeting at Jackson Hole is taking place online. Although Jerome Powell is making a speech, little market-moving information is expected to be revealed. It is possible Mr Powell makes comments on the timing of the tapering of asset purchases, but he is expected to keep his powder dry given the spread of the Delta variant.

There are signs that growth rates of leading economies are falling away. Is Stagflation – which is characterised by low economic growth and relatively high unemployment – on the horizon? We take a look at stagflation, inflation and falling growth rates in our recent article.

Geopolitics

China is continuing its crackdown on its tech sector. It has proposed new rules that would ban companies with large amounts of sensitive consumer data from going public in the United States. The Wall Street Journal said these new rules would target companies seeking foreign listing via units incorporated outside the country.

Chinese electric car maker BYD's plan to sell shares in its computer chip-making unit was suspended by authorities. The suspension relates to a regulatory investigation into the law firm advising the company, Beijing Tian Yuan Law Firm, one of China's biggest legal services groups. Beijing’s model of state-directed capitalism involves actively influencing and shaping the nature and direction of businesses in the country. No further details have been released.

China is clearly positioning itself to be a major international partner to the Taliban – and the deteriorating situation in Afghanistan raised concerns about the future supply of rare-earth metals, which are essential components in many pieces of technology. China’s Foreign Ministry said the world should “respect the choice of the Afghan people”. The government's spokesman added: “The Afghan Taliban has expressed several times that they hope to develop good relations with China, expect China to participate in their rebuilding and development, and will never allow any forces to use Afghanistan’s territory to harm China.” Afghanistan potentially offers Beijing a land bridge to the oilfields of Iran, but also the opportunity to help develop the resource-rich country’s mining industry. Geologists believe Afghanistan may hold the world’s largest deposits of lithium. This, along with nickel and cobalt, are crucial for modern rechargeable batteries.

Mergers & acquisitions

After Wm Morrison recently agreed to be bought by Clayton, Dubilier & Rice, British grocers remained newsworthy. J Sainsbury shares jumped following reports that another US private equity giant, Apollo Global Management, may be about to launch a £7bn bid for the supermarket group. Apollo previously was involved in a failed bid to take control of Asda. J Sainsbury shares hit a seven-year high.

Environmental Social and Governance (ESG)

Britain's Debt Management Office, which issues government bonds, said its first green gilt, designed to fund environmental investments, would carry a maturity date of July 31, 2033. The sale will take place in the week commencing 20 September.

Technology

Apple chief executive Tim Cook received more than five million shares in the iPhone maker, worth more than $750m. The award is part of a deal he struck when he took over from co-founder Steve Jobs. According to Apple's filing with the SEC, Mr Cook was eligible for the award as the company's shares had risen by 191.83% over the last three years.

Autos

The automobile industry makes no secret of the shortfall as it struggles to get back to pre-pandemic levels of sales and production. This will take some effort to resolve. We look at the sector’s woes in our recent article Carmakers have a major structural dilemma.

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Optimism returns & oil prices soar

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