Last Week in the City
Economic data boosted the reopening narrative this week, with the UK and US service sectors reporting significant activity. UK employers also took on permanent employees in May at the fastest rate since records started in the 1990s.
Concerns about a new variant of Covid-19 resulted in the UK government putting Portugal on its “amber list”. It was the only major holiday destination that had been originally put on the “green list” where travel is allowed without a period of quarantine on return. The news hit embattled airlines and travel groups.
An agreement on taxing the global tech giants may be close at hand, with the US delaying the implementation of tariffs for 180 days to allow talks to progress. Commodity prices also rose again this week, boosting miners.
The FTSE 100 rose 0.7% over the week and the FTSE 250 also added 0.7% by mid-session on Friday.
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Shares in tour operators and airlines slid after the UK removed Portugal from its “green list” of travel destinations that do not require quarantine on return, although passengers must take a Covid-19 test before their return and within two days of arrival back in the UK. Shares in companies such as easyJet and TUI fell.
US President Joe Biden unveiled a plan to share 25 million vaccine doses with poorer countries.
Office-space provider Workspace reported its first annual loss in more than a decade, as its rental income slumped following the introduction of work-from-home measures during the pandemic.
The Asian recovery is being slowed by the re-emergence of Covid-19 coupled with central bank and government action to prevent economies overheating. However, infection rates remain lower than in the West. We look at what’s going on in Asia and their response to the pandemic in our recent article.
The Federal Reserve (Fed) plans to begin selling its corporate debt in its emergency lending facility, which helped support credit markets during the pandemic, starting on 7 June. The Fed said there is no need for the facility if credit liquidity increases as part of the reopening phase of the economy. As corporate bond spreads widen, the Secondary Market Corporate Credit Facility (SMCCF) will sell its corporate bonds and exchange-traded funds but this will happen “gradually and orderly”.
The UK's biggest builders' merchant has warned customers of "considerable" cost increases to raw materials amid an industry-wide shortage. Travis Perkins raised the price of bagged cement by 15%, chipboard by 10% and paint by 5%. Management blamed surging demand as lockdown eases, as well as supply chain issues. Inflation is expected to rise in the second half of the year as economies reopen and demand for goods and services jumps. We look at the looming spike in inflationary pressures in our recent article, Inflation will rise and will test the Fed.
British employers took on permanent staff at the fastest rate since records started being kept in the late 1990s during May, in another sign that the economy is rebounding swiftly from the Covid-19 pandemic. Growth in temporary staff placements also hit a six-year high, according to the Recruitment and Employment Confederation (REC) trade body and accountants KPMG.
The UK’s service industry saw business activity grow at its fastest rate in 24 years in May as the reopening of the country’s economy after the pandemic continued to boost demand. The UK Composite Purchasing Managers’ Index (PMI) for services from IHS Markit rose to 62.9 in May, up from 61 in April. A score above 50 indicates expansion. This set the scene for an “eye-popping rate” of UK GDP growth in the second quarter of 2021, according to IHS Markit's economics director Tim Moore.
Business activity in the US service sector also expanded at a record-setting rate in May with the Markit Services PMI climbing to a new high of 70.4 from 64.7 in April. This reading came in higher than the flash estimate and the market expectation of 70.1. IHS Markit said: “The US economic recovery shifted up a gear in May, with output of the combined manufacturing and service sectors surging past all prior peaks by an impressive margin."
The Eurozone’s manufacturing PMI has hit a new record high – as factory activity surged and inflationary pressures built. The index hit 63.1 in May, up from April’s 62.9.
The US approved but then delayed the implementation of tariffs on about $2bn of imports in retaliation for taxes on its big technology companies. The 25% tariffs apply to certain goods from the UK, as well as Austria, India, Italy, Spain and Turkey, but these are now subject to a 180-day suspension. US Trade Representative Katherine Tai said the delay would allow more time for discussions on tax. "The US remains committed to reaching a consensus on international tax issues," Ms Tai said. Washington previously described the digital services taxes as "unreasonable" and "discriminatory" against American social media companies, online marketplaces and technology groups. UK Chancellor Rishi Sunak said he was “confident” than an agreement can be reached.
China’s moves against western clothing companies in retaliation for the imposition of sanctions relating to human-rights abuses in the cotton-growing Xinjiang region continued. The country accused several clothing brands of selling goods that could be “harmful to children”. A warning notice on the country's customs administration website listed 81 items imported by companies including Nike, H&M and Zara.
Russia will sell US-dollar assets held in its $186bn National Wealth Fund as Washington continues to impose sanctions on Moscow. The move was announced at the St Petersburg International Economic Forum by Finance Minister Anton Siluanov. “Like the central bank, we have decided to reduce investments of the NWF in dollar assets,” Mr Siluanov said, adding that the NWF will instead invest in euro, Chinese yuan and gold assets.
UK Chancellor Rishi Sunak said a U.S. proposal to focus on the world's 100 biggest and most profitable companies as part of a global tax deal could work but insisted that big technology groups must pay more tax in countries where they operate. Mr Sunak said the G7 was making "really good progress" on the long-disputed reform. World leaders meet at the G7 Summit in Carbis Bay, Cornwall between 11 to 13 June. We look at whether the biggest meeting of world leaders since the Covid-19 pandemic began will impact global markets in our article, Will the G7 impact markets?
Environment, Social and Governance (ESG)
US President Joe Biden offered to scrap his proposed corporate tax increases during negotiations with Republicans, in what would be a major concession by the Democratic president as he works to hammer out an infrastructure deal that aims to build a “green” infrastructure across the country. Mr Biden offered to drop plans to raise corporate tax rates as high as 28% and instead set a minimum 15% tax rate aimed at ensuring all companies pay taxes, reports suggested. In return, Republicans would have to agree to at least $1 trillion in new infrastructure spending.
The growing importance of ESG factors in investment decisions was underscored after credit-ratings agency Moody’s announced the expansion of its ESG profile and credit impact scores across several corporate and government sectors. The new sectors include global pharmaceuticals, medical device companies, regulated electric and gas utilities with generation, US states and large US cities and counties. Moody’s will now integrate ESG considerations into the credit analysis of the sectors, including each sector’s risk exposure and the degree of credit impact.
Danish energy-provider Ørsted said it aimed to become the world’s leading green-energy major by 2030. Management unveiled plans to grow the company’s renewable energy capacity to 50 gigawatts (GW) by 2030 from 12 GW today.
The world’s ten largest microchip-manufacturing companies saw their revenues surge to a record high in the first quarter of 2021, according to market research group TrendForce. Taiwan’s TSMC remains the largest chip foundry in the world. The combined quarterly total revenue of the chipmakers rose to a record $22.75bn, as prices rose in the current chip shortage.
The US is close to approving $52bn of funding for the semiconductor industry as the tech rivalry with Beijing escalates. Garry White argues that this is politics not business in his article, Chips now the front line of the East-West tech battle. Furthermore, he looks at the semiconductor-industry supply crunch in an additional article, The political significance of the microchip industry.
Tesla has allegedly repeatedly failed to pre-approve founder and chief executive Elon Musk's tweets, according to US press reports. In 2018, the US Securities and Exchange Commission (SEC) accused Mr Musk of misleading investors, following comments about taking Tesla private. An agreement was made requiring Tesla's lawyers to pre-approve certain tweets. Now reports suggest the regulator believes Mr Musk and Tesla have broken the terms of that deal.
A Russian cyber-criminal group, REvil, was behind a ransomware attack that has targeted the world's largest meat processing company, the FBI said. The cyber-attack over the weekend shut some JBS operations in the US, Canada and Australia. REvil – also known as Sodinokibi – is one of the most prolific and profitable cyber-criminal groups in the world.
Amazon said it will expand its Covid-19 laboratory testing facilities in the UK, to benefit “employees and UK public health”. However, analysts said it could also provide business opportunities in the health sector and help improve the retail and cloud-computing giant’s reputation following controversies over working conditions for its staff.
Mining & commodities
Iron-ore prices bounced following a period of weakness, following reports that steel hub Tangshan plans to ease requirements for production cuts at its mills. The Tangshan government held a symposium on Monday, where it considered lower output restrictions for some mills that had finished ultra-low emission upgrades, according to state-backed newspaper the Securities Times.
UK petrol prices have climbed to their highest level in two years, according to the RAC. Retailers may be charging more to make up for lower fuel sales during the pandemic, it said. Pump prices fell in May 2020 to a low of 106p as oil prices plummeted, as motorists had to abide by travel restrictions. However, the average cost of a litre has since soared to 129.27p, the highest level since August 2019.
South West Water owner Pennon revealed that it had bought Bristol Water for £425m as it consolidated its position as the south-west’s largest water company. Management also unveiled a special dividend of £1.5bn to shareholders, as well as a £400m share-buyback programme, following the sale of its waste group Viridor.
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