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Russia further reduces the flow of gas to Europe

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 29 July 2022.

| 11 min read

US equities rose and the dollar slipped as investors now expect the Federal Reserve will slow the pace of interest rate hikes following its second consecutive 75 basis point increase this week, which was in line with expectations. Despite evidence of a slowing economy, the Fed indicated that there will be "ongoing increases" in borrowing costs as central banks attempt to dampen the biggest jump in inflation since the 1980s.

The second-quarter earnings season continued apace, with the overall tone generally positive. There are signs that supply chain woes are easing, while price increases to fight inflation are boosting revenues.

The energy stand-off between Moscow and the European Union (EU) continued as the capacity of Nord Stream 1 pipeline – the major delivery route to Europe for Russian gas – was cut to a fifth of its total capacity. Hanover became the first large city to announce energy-saving measures, including turning off hot water in the showers and bathrooms of city-run buildings and leisure centres. It is also switching off spotlights on public monuments and turning off its fountains to reduce its energy consumption.

Over the week, the blue-chip FTSE 100 index was +1.5% by mid-session on Friday, with the more UK-focused FTSE 250 +1.4%.

Supply-chain issues, the Russia-Ukraine conflict, a tech selloff, cost-of-living crisis and 10%+ inflation… It has been an interesting six months or so. George Davey explains why a structured financial plan is vital for your future in today’s volatile world.

Financial resilience: Our latest consumer research shows that people across the UK are concerned and are losing sleep worrying about their finances and most people are not prepared for an increase in costs.

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NEW: We need to talk about investing – Ep. 12: How to save for your retirement.

Is there light at the end of the inflation tunnel? In this Charles Stanley Radio podcast, Garry White and John Redwood discuss investors’ difficult few months.

Ukraine conflict

Vladimir Putin further reduced gas supplies to Germany and central Europe, sending energy prices soaring. Russian state-controlled group Gazprom said it will cut supplies through the Nord Stream 1 pipeline to 20% of capacity, having already cut them to 40% of normal levels. European natural gas prices have jumped by 17% in two days and electricity and coal prices jumped.

National Grid, the UK power network's electricity system operator, said it expects supply to be tight at times this winter, most likely in the first half of December. Nevertheless, it said that the lights will stay on – but this will come at a price as demand will be met by purchasing expensive power from abroad. Household energy bills could potentially rise to £3,850 this winter due to shortages in electricity supply, it has been estimated. BFY Group, a utility consultancy, said households could see energy bills of £500 in the month of January 2023 alone.

Covid-19

There is no let-up in China on Beijing’s strict ‘zero-Covid’ policy, with the city of Wuhan in its central Hubei province reintroducing major restrictions in a district of one million people. This followed the discovery of just four asymptomatic cases of coronavirus infections. The policy continues to have a significant economic impact on China’s economy and the ruling party has scrapped its economic growth target for this year. The 25-member Politburo – the ruling Communist Party's top policy-making body – said it aimed to keep growth within "a reasonable range". It did not mention the official growth target of 5.5% set earlier this year, which is now unlikely to be met.

World Health Organisation (WHO) Director-General Dr Tedros Adhanom Ghebreyesus noted that deaths from Covid-19 globally have increased over the last five weeks, with some countries witnessing increasing trends in hospitalisations. The latest wave of infections is driven by the most infectious and transmissible variant identified so far, named BA.5. Based on DNA sequencing data reported to the WHO, about half of all coronavirus cases globally are now caused by this variant. In the US, BA.5 accounts for about 80% of new cases, according to the latest data from the US Centers for Disease Control and Prevention. Dr Ghebreyesus urged all countries to strengthen their readiness and response plans for any possible future Covid-19 waves.

The number of people visiting UK shopping centres has now recovered to pre-pandemic levels. Property group Hammerson revealed that interim earnings had more than doubled compared with last year, as rising rents in the retail sector bolstered the shopping-centre owner’s results.

Economics

The US Federal Reserve reinforced its hawkish stance on inflation as the central bank raised its key interest rate by 75 basis points. It is now targeting a range of 2.25% to 2.5%. At a press conference, Federal Reserve Chair Jerome Powell acknowledged that parts of the economy were slowing, but said the bank was likely to keep raising interest rates in the months ahead despite the risks, pointing to inflation that is running at a 40-year high. "Nothing works in the economy without price stability," Mr Powell said. "We need to see inflation coming down...That's not something we can avoid doing." However, there were hints that the pace of rate increases will slow, which helped equity markets.

There was better news on economic growth from Europe.

The US economy shrank for a second consecutive quarter, meeting one of the common criteria for a technical recession. GDP contracted by 0.9% on an annualised basis in the second quarter after the US economy shrank by 1.6% year-on-year in the first three months of 2022. However, the US determines whether it is a recession or not in a different way. The US relies on a determination by a group of researchers at the National Bureau of Economic Research who look at a broader range of factors, arguing the “two-quarters of contraction” definition is to a blunt a measure. The White House maintains that the US economy is not at present in a recession, with Treasury secretary Janet Yellen saying earlier this week that she would “be amazed” if the NBER declared it was.

There was better news on economic growth from Europe. German GDP was unchanged in the last quarter, while France avoided a recession - and Spain and Italy beat expectations significantly.

Earnings reporting season is also indicating just how much companies are raising prices, as the ‘cost-of-living’ crisis continues. Nestle, the world’s largest food group, has raised prices again due to "unprecedented" increases in costs. The Swiss group raised prices the most in North America (9.8%), with the average global price hike in the first half of 2022 hitting 6.5%. Unilever warned that it had not yet passed on the full impact of input cost rises to consumers, after lifting prices 11% year-on-year in the second quarter compared with last year. McDonald's also increased the cost of a cheeseburger for the first time in 14 years, with management indicating that other big price increases were on the horizon. Soft drinks giant Coca-Cola also confirmed it had raised its average selling prices about 12% in the second quarter.

Geopolitics

There was good news for peace in the South China Sea. US President Joe Biden and Chinese President Xi Jinping managed largely to steer clear of escalating the situation in a rare telephone call, suggesting that neither side wants a fresh crisis across the Taiwan Strait, as both men remain preoccupied with troubles and woes at home.

Environmental social and governance (ESG)

Regulators have started investigating claims of “greenwash”. The UK's competition watchdog is investigating Asos, Boohoo and Asda over claims about the sustainability of their fashion products. If the companies are found to have made misleading claims, the Competition and Markets Authority (CMA) said it would not hesitate to act. Concerns include the use of vague language, which may suggest collections are “greener” than they actually are.

Corporate reports of note

Energy companies continue to benefit from current high prices. British Gas owner Centrica posted interim profits that were five times higher than those reported in 2021 and Shell made record profits of almost £10bn in the second quarter and announced a $6bn share buyback and a $1.8bn dividend payment. The scale of the oil companies’ profits prompted the UK government to eventually give in to demands for a windfall tax to redistribute some of the profits, although some senior Conservative ministers are now believed to be in favour of removing the tax, amid the leadership campaign that will lead to a new prime minister and cabinet in September.

US retail behemoth Walmart US retail giant issued its second profit warning in ten weeks in an unscheduled update. In May management warned profits would fall 1% this year – it now expects that profits may fall by as much as 13% this year. The news hit shares in other major US retailers including Amazon and Target.

UK home improvement group Wickes also reduced market guidance as the DIY market slows as consumers rein in spending. This was despite the group posting strong first-half sales. Wickes said it now expects full-year profit in the range of £72m to £82m, having previously forecast “no less than £83m”.

Facebook and Instagram owner Meta posted its first-ever year-on-year fall in sales, as a slowdown in advertising spending caused revenues to slip 1% annually in the second quarter. Meta, which typically has more than 20% of the global advertising spend coming through its books, warned investors that ad sales were likely to fall again in the months ahead.

There was a better outcome for Amazon and Apple, with better-than-expected quarterly sales, reassuring investors in both groups. Amazon said that higher fees for its Prime membership would boost its bottom line, while Apple said demand for its all-important iPhone remained strong.

Raising interest rates are generally good for bank shares, as banks can earn more from the spread between the interest they pay to savers and what they can earn from highly-rated government debt such as Gilts and Treasuries. Shares in NatWest jumped 8% after the bank announced a special dividend for shareholders and raised its full-year guidance. Lloyds Banking Group also posted a good set of interim numbers – but Barclays saw profits halve after it was forced to put aside £1.3bn to cover a US trading blunder.

Investing in the themes of tomorrow: Building an investment portfolio requires peering into the future. So, what are today’s major growth areas investors should consider?

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.

Russia further reduces the flow of gas to Europe

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