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Recovery fears grow as Delta variant spreads

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 9 July 2021.

| 12 min read

Last Week in the City

Fears that the fast-spreading Delta variant of Covid-19 will hurt the global recovery hit equities this week, as investors worried that economic growth could be slowing. A number of economic releases, particularly from China, were also weaker than expected, adding to the concerns that growth had already peaked.

The FTSE 100 fell 1.3% over the week and the FTSE 250 down 0.4% by mid-session on Friday.

Jon Cunliffe, Charles Stanley’s Chief Investment Officer, reviews the market action in June in his monthly market commentary.

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

Public health authorities across the US warned that the Delta variant, a “hyper-transmissible” form of Covid-19 responsible for about 25% of new US infections, was spreading rapidly. In California, the Delta variant now accounts for 35.6% of specimens sequenced that are categorised as “variants of concern” or “variants of interest” as of 21 June, up from 5.6% in May. Covid-19 cases have surged by more than 20% in California since the state lifted the majority of pandemic restrictions on 15 June, with the Delta variant spurring the greatest proportion of new cases. The Delta strain is prevalent in Britain, India and Russia and appears set to be the world’s dominant strain of the infection.

UK prime Minister Boris Johnson set out the details of the final step of England's “roadmap” out of the Covid-19 lockdown, although a final decision is yet to be made. Legal restrictions will be dropped to allow people to make "informed decisions" on managing the virus, he said. On 19 July, rules such as the requirement to wear masks, the rule of six and the ban on nightclubs are expected to end. Work-from-home guidance will also be withdrawn and venues such as sports stadiums and theatres can return to full capacity. The changes still need to be signed off on 12 July and will be data driven.

There was some good news for the embattled travel sector, as bookings for flights and holidays surged following the UK government’s decision that fully-vaccinated travellers returning from amber-list countries will not have to self-isolate after 19 July. Airlines said there was a rapid rise in ticket purchases within hours after the government announced it was relaxing quarantine rules. Short-haul carrier easyJet said bookings to amber-list destinations increased 400%. However, gains in shares in easyJet and British-Airways-owner IAG had lost most of these gains by Friday.

JD Wetherspoon said it will have to put up the price of food in its pubs by around 40p a meal if the Covid-19 related VAT cut for the hospitality industry is not extended. The tax was cut on food sold in pubs from 20% to 5% during the pandemic to help struggling businesses, but this will be reversed in stages over the next year, rising to 12.5% in September 2021. However, there was some good news for the pubs and hospitality sector after England made it into the finals of the Euro 2020 soccer tournament, which was postponed from last year. Wetherspoon let all its pubs show the England vs Denmark semi-final after its previous no-football policy saw its sales slump following the start of the tournament.

Shoppers are starting to return to pre-pandemic habits when it comes to buying food, according to J Sainsbury and Ocado. J Sainsbury said demand for online sales has slipped from peak levels as people return to shopping in stores. Ocado said average order sizes has slipped as people start to eat out more. However, both groups noted that online sales were way above pre-pandemic levels. J Sainsbury's said 18% of its sales were now online, compared with 8% in the 2019-20 financial year.

Property group Land Securities confirmed that it was making progress on rent collection. The group collected 81% of the £103m in rent payments it was owed in its latest quarter, up from 80% in the quarter ended December. Most of the rent collected was from offices, with 95% collected, while regional retail spaces came in at 73%, and the rest of London had a collection rate of 71%. The pandemic has sent the commercial property sector into a state of flux with valuations falling sharply as the future remains uncertain. We examine what lies in store for Britain’s landlords in our article, Big changes in commercial property.

Economics

The UK recovery appeared to stall slightly, after May GDP growth of 0.8% month-on-month came in below expectations, despite the reopening of indoor hospitality. This left British output 3.1% below its pre-pandemic peak, with weakness in services remaining the main culprit.

Other macro data also disappointed:

  • Growth in China's services sector slowed to a 14-month low in June, hit by a resurgence of Covid-19 cases in southern China, a private survey showed on Monday, adding to concerns its recovery may be starting to lose some momentum.
  • German industrial production declined in May, missing expectations for an increase.
  • China's factory gate inflation eased in June after a government crackdown on runaway commodity prices, but the annual rate stayed uncomfortably high.

Minutes from the June meeting of the Federal Open Market Committee meeting showed two prevailing camps on the Federal Reserve’s policy setting board trying to determine whether the US economy was ready for a more-rapid withdrawal of its $120bn asset purchase programme. There is a visible divide among the core leaders of the committee, who embrace a “moderately dovish” stance regarding the tapering of asset purchases and rate rises, compared with more-hawkish regional Fed Presidents. We look at how the Fed's view of inflation recently changed in a recent article.

The Governing Council of the European Central Bank (ECB) published its long-awaited new monetary policy strategy. The ECB’s new strategy is unlikely to have a profound impact on its policy stance. It mostly clarifies and makes permanent changes that have already been observed and communicated in practice. Inflation is well below its 2% target at 1.4%. The ECB revised its inflation target and which allows consumer prices to overshoot when deemed necessary. The target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable.

As the ECB prepares to alter its inflation target, President Christine Lagarde will want a dovish compromise to ease German fears it is funding excess spending in other states. We look at whether the EU is becoming a debt and a transfer union.

Geopolitics

Boris Johnson said the UK government would examine the takeover of the UK’s largest silicon wafer manufacturer by a Chinese-backed company on national security grounds. Newport Wafer Fab, which produces silicon wafers at its plant in Wales, was recently purchased by Nexperia, a Netherlands-based company that is Chinese owned and already operates a similar facility in Manchester. Legislation was introduced last year to strengthen powers to block takeovers based on security concerns. Does economic nationalism mean a ‘Splinternet’ is inevitable?

Meanwhile, two senior members of Congress called on the Securities and Exchange Commission to investigate whether Didi Chuxing misled investors ahead of its recent IPO in New York. In particular, the two members of the powerful Senate banking committee want the SEC to probe whether the Chinese ride-sharing company was forthcoming about its contact with Chinese regulators prior to the listing of its shares. The shares have slumped by a quarter after China’s internet regulator ordered its app be removed from domestic stores over concerns about data security.

Britain’s Brexit “divorce bill” is €47.5bn (£40.8bn) according to estimates from Brussels that are higher than the UK government’s forecasts. The first tranche of €6.8bn is due for payment by the end of the year. In 2018 the Office for Budget Responsibility put the Brexit bill at €41.4bn (£37.1bn). During the Brexit negotiations, British government officials said the final bill would be around £35-39bn. The bill covers the UK’s share of EU debts and liabilities during 47 years of membership, such as paying for infrastructure projects, pensions and sickness benefits for EU officials. A UK government spokesperson said: “This is just an accounting estimate, and does not reflect the exact amount the UK is expected to pay to the EU this year.”

Toyota said it will stop donations to members of the US Congress who voted against certification of President Biden's election victory. The Japanese company faced criticism over the contributions after the 6 January attack on the US Capitol. Toyota donated more than $50,000 to Republicans who tried to block approval of the US President's win in some states, it emerged last month. The company had previously defended the payments.

Is more compromise required for global tax deal? The world is awash with state debts and with governments wanting to spend more. As countries unite to try and agree a global tax deal, we examined the likelihood of a rise in “green” taxes.

Environmental, social and governance (ESG)

Accounting firm PwC said it would invest $12bn over five years to create 100,000 new jobs aimed at helping its clients grapple with ESG, diversity reporting and artificial intelligence, as part of its new global strategy. The new hires will come from mergers and acquisitions and direct hires from competitors, management said.

Technology

Donald Trump filed a lawsuit against tech giants Twitter, Facebook and Alphabet-owned Google, claiming that he is the victim of censorship. The class action lawsuit also targets the three companies' chief executives. The former US president was suspended from his social accounts in January over public safety concerns in the wake of the riots at the Capitol, which were led by his supporters. Mr Trump called the lawsuit “a very beautiful development for our freedom of speech”.

Apple co-founder Steve Wozniak issued a major endorsement of the “right-to-repair” movement, despite the iPhone makers opposition to the idea. The movement wants laws passed to guarantee users have access to information and parts to repair their own devices. Right-to-repair advocates say Apple is one of the fiercest opponents to expanding the legislation to cover consumer electronics.

Google, owned by Alphabet, is being sued by 37 US states over policies on its Android app store, Google Play. The lawsuit claims that Google has used "monopolistic leverage" to generate large profits from its own store. It also claimed Google had bought off competitors.

Virgin Galactic’s billionaire founder Sir Richard Branson plans to kickstart the space tourism industry with a mission to the edge of space on Sunday.

Autos

Carmakers need to intensify their spending on new model design, tooling and new production lines to be ready for a surge in battery-vehicle demand. But, as vehicle sales fall, how will this be funded? We take a look at the “double jeopardy” for car manufacturers inour recent article, Carmakers face their own climate emergency.

Mergers & acquisitions

A bidding war for one of the UK’s largest grocers may be in prospect after reports suggested US investment group Apollo Global was considering making an offer for British supermarket Wm Morrison, just days after the company agreed to a £6.3bn takeover by Fortress Investment Group.

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.

Recovery fears grow as Delta variant spreads

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