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Markets subdued as more Chinese lockdowns loom

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week ending 10 June 2022.

| 8 min read

China’s strict lockdowns to deal with Covid-19 damaged global supply chains hit earnings and productivity at western businesses and provided a boost to the inflation problem that is currently squeezing consumers. This underscored the optimism that emerged when restrictions in China’s megacities started to be eased last month. However, clusters of infection have re-emerged with parts of Shanghai now subject to new Covid-19 curbs as Beijing stands firm on its “zero-Covid” policy. The news cast a large shadow over global markets towards the end of the week.

Elsewhere: The European Central Bank is now planning its first interest rate rise in 11 years as it attempts to get to grips with inflation; UK banks are no longer regarded as “too big to fail”; and there was finally some good news for the Chinese technology sector.

This week, the blue-chip FTSE 100 index was 1.9% lower by mid-session on Friday, with the more UK-focused FTSE 250 also down by 1.9%.

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Ukraine and commodities

Oil refineries are making almost five times as much money from refining petrol as they did a year ago, new data has revealed. A lack of capacity to refine petrol and diesel from crude oil has helped to push fuel prices to record levels and increased profits for refinery owners. Petrol prices are at an all-time high though the oil price remains well below record levels.

On Wednesday, the RAC noted that the fastest rise in petrol prices for seventeen years took place. On Thursday, the motoring services group said the cost of filling a typical family car passed £100 for the first time.

A report published by the United Nation's Food and Agriculture Organisation (FAO) argued that higher food prices will not lead to more supply. Those higher prices may continue rising next year and beyond. In its six-monthly outlook report on global food markets, the FAO said the world's poorest countries were on course to see bills for food imports rising while getting less volume delivered. In Sub-Saharan Africa that rising price exacerbates the impact of extreme dry weather with Somalia facing a potential famine.

After talks in Ankara, both Russia and Turkey announced support for a “safe corridor” in the Black Sea to allow Ukrainian grain exports, but Kyiv rejected the proposal, saying it was not credible. The EU also accused Moscow of “weaponizing” food supplies to gain an advantage in the war.

Russia also demanded Ukraine remove mines from the Black Sea, and both Moscow and Ankara said the West should ease sanctions on Moscow to allow the export of Russian grains amid an escalating world food crisis. While food exports are technically exempt from the sanctions, Russia claims that restrictions on its ships and banks make it impossible to deliver its grain to market.

The FAO notes there are 45 countries that depended on Russia and Ukraine combined for more than half their sunflower oil last year. Among the 16 nations with a 90%-plus dependency were populous ones: China, Turkey and Egypt. This year, facing political pressure from rising prices, producers such as India have responded by banning or constraining exports of their farm produce, pushing up the price of traded goods further.

Economics

Chancellor Rishi Sunak has been accused of failing to act soon enough to save £11bn of taxpayers' money that has been used to pay interest on government debt. The National Institute of Economic and Social Research (NIESR) said the losses were a result of Mr Sunak’s failure to ensure against interest rate rises, resulting in higher-than-necessary payments on £900bn of reserves created through quantitative easing (QE).

UK banks are no longer regarded as “too big to fail”. The Bank of England said it was satisfied that Britain’s top banks could be shut without putting at risk the stability of the financial system or disrupting customers. This means they will not need taxpayers to bail them out as occurred in the 2007-09 global financial crisis.

The European Central Bank (ECB) decided to make a major shift in its policy stance. It will continue creating more euro until the end of this month and will then start raising interest rates with a 0.25% hike at its July meeting.

Chinese President Xi Jinping called on his government to adhere “unwaveringly” to its "Zero-Covid" policy.

The global economy faces a protracted period of weak growth and high inflation reminiscent of the 1970s as the impact of a two-year pandemic is compounded by Russia’s invasion of Ukraine, the World Bank warned. In its twice-yearly economic health check, the World Bank said echoes of the stagflation of four decades ago had forced it to cut its growth forecast for this year from 4.1% to 2.9%.

The World Bank produced some headline-making pessimism, warning us all that stagflation stalks the globe. But, when you look at its forecasts, we think the picture is not quite as gloomy.

Covid-19

Chinese President Xi Jinping called on his government to adhere “unwaveringly” to its "Zero-Covid" policy, while at the same time striking a balance with the needs of the economy. Xi urged all regions and departments to be resolute in overcoming economic difficulties as they coordinate China’s response to the virus.

Hopes that China’s recent easing of its strict Covid-19 lockdowns would allow supply chains to get back on track, helping dampen inflation worldwide, were dashed after more clusters of the virus emerged. China’s two major cities went back on fresh Covid-19 alert on Thursday after parts of Shanghai, China’s largest economic hub, started imposing new restrictions, while the most populous district in the Chinese capital shut entertainment venues. It looks like Beijing and Shanghai may be shut down once again. The news was responsible for global market weakness in the latter part of the week.

Data underscored the impact of lockdowns on China’s economy, with its exports growing at a double-digit pace in May, shattering expectations, as factories restarted operations and logistics snags eased after authorities relaxed some Covid-19 curbs in Shanghai.

Geopolitics

American relations with China are in the worst state since former President Richard Nixon’s historic trip in 1972 helped re-establish diplomatic ties between Washington and Beijing. That’s according to Nicholas Burns, the current American ambassador to China. He said there were “profound divisions” between the rival powers on everything from economics and technology to security and human rights.

Technology

Sentiment surrounding Chinese technology shares continued to improve after authorities in the Asian nation approved about 60 new video games, signalling a further easing of the crackdown on the sector which began last year. A report earlier this week that regulators were looking to end a probe into Didi Global also helped lift sentiment. The Hang Seng Tech Index gained more than 9% over three sessions.

Corporate news

UK competition authorities said it was planning to investigate the market dominance of Apple and Google's mobile browsers, as well as the iPhone maker's restrictions on cloud gaming through its app store.

US retail behemoth Target issued its second profit warning in less than a month. Management said it planned to cancel orders and further markdown prices to clear excess inventories in response to shifting consumer behaviour.

Credit Suisse issued its third profit warning this year. Management is considering a fresh round of job cuts as part of a renewed push to slash costs. The Swiss bank is now expected to post its third-consecutive quarterly loss, driven by a slump in its investment banking and trading division.

The microchip sector suffered following the leak of a memo from sector giant Intel. Intel told employees in an internal memo that all hiring and job requisitions in the client computing group were on hold for at least two weeks. During that time, the chipmaker will reportedly be re-evaluating its priorities with "increased focus and prioritization in our spending [to] help us weather macroeconomic uncertainty," the chipmaker said.

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Markets subdued as more Chinese lockdowns loom

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