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Markets take Fed taper in their stride

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 5 November 2021.

| 11 min read

As we entered November, central banks and climate-change dominated the agenda.

The Bank of England decided to err on the side of caution and not raise interest rates this month, preferring to see jobs data in December following the end of the UK’s furlough scheme before it made such a major call. As widely expected, the US Federal reserve announced it was tapering asset purchases. The third-quarter earnings season has boosted confidence in the recovery, resulting in the S&P 500 index closing at new record highs for six days in a run.

Meanwhile, in Glasgow, discussions took place that aimed to limit global warming to 1.5 degrees. Many bold targets were set, but many major polluters did not sign up to key pledges.

The blue-chip FTSE 100 index was up 1% over the week by mid-session on Friday with the more UK-focused FTSE 250 2% ahead.

Covid-19

The first pill designed to treat symptomatic Covid-19 has been approved by the UK medicines regulator. The tablet – molnupiravir – will be given twice a day to vulnerable patients recently diagnosed with the disease. In clinical trials the pill, originally developed to treat flu, cut the risk of hospitalisation or death by about half.

China's new locally transmitted Covid-19 cases spiked to a near three-month high and tighter curbs to contain the spread are expected in the capital Beijing ahead of a key gathering of the highest-ranking members of the Communist Party. The Communist Party will hold its sixth plenary session between 8 and 11 November. We look at the China's move towards more-communist ideals.

The Chinese government told families to keep daily necessities in stock in case of emergencies, after Covid-19 outbreaks and unusually heavy rains that caused a surge in vegetable prices raised concerns about supply shortages.

Pfizer raised its full-year sales guidance for its Covid-19 vaccine by 7.5% to $36bn, as it signs deals with countries for booster doses and receives clearances for using its shots in broader age groups. The US pharma group said it is also on track to deliver 2.3 billion doses of the vaccine, out of the roughly 3 billion it plans to make this year.

Germany's Lufthansa returned to profit in the third quarter for the first time since the Covid-19 crisis started, as an easing of travel restrictions resulted in strong demand for flights during the summer season. Profits at Airbnb in the quarter rose 280% year-on-year and the company beat Wall street revenue expectations.

Ryanair said it will be heavy price discounting to fill its aircraft this winter, despite a recent pick-up in business. The low-cost carrier reported a net profit at the half-year stage. The airline expects to return to profitability in the year ending March 2023. The company also said it was considering delisting from the London Stock Exchange after 20 years to comply with EU rules following Brexit. EU-based carriers must be owned and controlled from within the bloc, and Brexit means that UK nationals no longer qualified.

The implications of the Covid-19 pandemic will be felt in markets for some time to come. We look at the long shadow of Covid-19 on markets.

Economics

As expected, the US Federal Reserve announced it would start to taper its asset purchases – so-called quantitative easing – this month. However, chairman Jerome Powell said the Fed "can be patient" about raising interest rates. The US central bank has been buying $120bn of assets each month throughout the pandemic to help keep borrowing costs low. The Fed's purchases of Treasuries and mortgage-backed securities would be scaled back by $15bn each month, with purchases expected to end in mid-2022. The central bank restated its belief that current high inflation is "expected to be transitory" and argued that price pressures will ease and pave the way for stronger employment and economic growth in the months to come.

The Bank of England defied some expectations and did not raise interest rates from historic lows of 0.1%. The minutes of the meeting indicated that most policymakers wanted to wait for more employment data, to see the impact of ending the furlough scheme just over a month ago, before deciding to tighten monetary policy. The UK’s central bank also cut its growth forecasts and flagged that rising prices will hit household incomes. Britain’s economy is not expected to regain its pre-pandemic size in the first quarter of 2022, later than the Bank’s forecast of the last three months of this year, which it issued in August. Sterling slid following the news.

COP26/Environmental, Social & Governance (ESG)

As the great and the good met for the United Nations COP26 climate-change conference in Glasgow, the oil industry showed that there was plenty of life left in the industry yet as investors in wind technology viewed some gloomy earnings reports.

BP beat market expectations in the third quarter. The group’s profits have risen sharply as oil and gas prices soared amid the global economic rebound. The energy major expects natural gas prices to remain higher in the next few months of peak winter demand. Chief executive Bernard Looney told news agency Reuters that the oil giant was “a cash machine at these sort of prices”.

Ben van Beurden, chief executive of Royal Dutch Shell, insisted that the energy behemoth can transition to net zero by 2050, but it will need the cash from its oil and gas business to pay for it.

Oil prices moved lower over the week after US oil inventories started to rise. However, crude futures rallied on Friday after OPEC+ producers rebuffed a call from joe Biden to raise supply.

It was a stormy week for investors in the wind industry. Denmark’s Vestas, the world's largest maker of wind turbines, slashed its 2021 guidance for the second time this year sending its shares lower. Management blamed higher costs and supply constraints. Danish peer Orsted also reported third-quarter profit slightly below expectations as low wind speeds continued to hit earnings. Low wind speeds have been partially blamed for a jump in gas prices this year. This shows that despite strong fundamentals, renewables continue to be an intermittent technology where swings in the level of winds – or sunshine in the case of solar energy – has a direct impact on earnings.

Some of the commitments made so far at COP26 include:

  • More than 40 countries agreed to shift away from coal, the biggest contributor to climate change. However, coal-dependent Australia, India, China and the US, did not sign up to the pledge.
  • Banks, insurers and investors with $130 trillion at their disposal – or 40% of global assets –pledged to put combating climate change at the centre of their work.
  • The US and the EU announced a global partnership to cut emissions of the greenhouse gas methane by 2030.
  • More than 40 countries backed the first international commitment to achieve "near-zero" emission steel production by 2030.
  • A pledge to end deforestation by 2030 from more than 100 countries.

We round up the week in Glasgow, in our article, COP26 will direct substantial green investment.

There was more bad news for the environment and inflation. Global food prices hit the highest level in more than a decade after rising by in excess of 30% over the last year, according to the United Nations Food and Agriculture Organization (FAO). The agency's figures highlighted the soaring cost of cereals and vegetable oils around the world. Vegetable oil prices hit a record high after rising by almost 10% in October.

The majority of people are starting to understand the impact fossil fuels has on our environment. But is the same true with our food – one of the big contributors to climate emissions? We look at the future of food.

Geopolitics

The Pentagon sharply increased its estimate of China's projected nuclear weapons arsenal over the coming years, saying that Beijing could have 700 warheads by 2027 and possibly 1,000 by 2030. While the numbers will still be significantly smaller than the current US nuclear stockpile, they represent a significant change in the forecast from last year, when the Pentagon warned the Chinese arsenal would top 400 by the end of the decade.

Republican Glenn Youngkin won the Virginia governor’s race. The high turnout may be bad news for President Joe Biden as it is the first sign that Republicans may be poised to seize control of Congress in next year’s mid-term elections. Joe Biden’s presidency started on a high, with optimism about Washington’s change in direction. However, he has failed to deliver the unity – and spending – that he promised. We look at the issues facing the 46th President in our article, The US wrestles with its recovery plans.

Beijing is making progress on its centrally-planned strategy to boost its home semiconductor market. Chinese technology giant Tencent Holdings revealed it was developing three microchips – one for AI computing called Zixiao, another known as Canghai for video processing and a chip for high-performance networks called Xuanling. Chinese tech rival Alibaba unveiled a new server chip for data centres last month and smartphone maker Xiaomi unveiled its Surge 1 chip for image processing in phone cameras earlier this year.

As the ruling party of Fumio Kishida wins a comfortable victory in Japan’s general election, we look at what changes in policy we can expect from new prime minister Fumio Kishida.

Supply issues

Christmas shoppers who have not already bought all their devices may not get them in time, Simon Segars, the chief executive of chip designer ARM, has warned. Mr Segars said the mismatch between supply and demand was "the most extreme" he has ever seen. The "unprecedented" crisis won't be completely fixed by Christmas 2022, he predicted. In some cases, the wait for chips was taking 60 weeks, he said. Indeed, customers are Christmas shopping early, according to Marks & Spencer, as footfall increased. Many are expected to complete their entire Christmas shop by the end of November, the retailer said.

High-street stalwart Next beat market expectations again, thanks to strong demand from online shoppers. However, management warned that rising inflation and supply chain disruption will weigh on sales growth over Christmas. “Stock availability has improved but remains challenging,” Next said. Full-priced sales jumped in the last three months compared with two years ago. Internet shopping continued to drive sales growth – up 40% in August-October compared with two years ago.

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Markets take Fed taper in their stride

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