Fears about sharply rising prices and their impact on consumers hit stock markets globally, with concerns about an economic slowdown resulting in US stock markets recording their biggest one-day drop since the early days of the Covid-19 pandemic. The equity sell-off was sparked by gloomy forecasts from major US retailers, with Target and Walmart issuing warnings on margins. This implied some companies were having difficulty passing on rising costs to already-squeezed consumers. This is negative for corporate margins and therefore profits. However, markets staged a modest rally on Friday.
Underscoring the cost-of-living crisis, inflation in the UK reached a 40-year high of 9% in April – and consumer confidence plunged to its lowest level since data started being recorded in 1974. Central banks globally may need to aggressively raise interest rates as they try to put a lid on rising prices.
This week, the blue-chip FTSE 100 index was flat by mid-session on Friday, with the more UK-focused FTSE 250 +0.4%.
Unpicking the frenetic market action of recent weeks: In our latest episode, Chief Investment Commentator, Garry White and Chief Global Strategist, John Redwood sit down to discuss the recent market gyrations, including the frenetic action which we’ve seen over the last couple of weeks. Rob Morgan also asks whether it's possible to time the markets.
Ukraine and commodities
The European Union (EU) said companies can keep buying gas without breaching sanctions, as it softened its stance in a standoff with Moscow over energy supplies. Poland’s prime minister, Mateusz Morawiecki, expressed “disappointment” that some EU member states are willing to pay for Russian gas in rubles, amid reports that the proposals allow them to do so without breaking sanctions. Poland recently saw its Russian gas supplies cut off by Gazprom after it refused Moscow’s demand to pay in rubles.
The EU also fleshed out details of its plan to ramp the bloc’s renewable energy capacity and reduce its reliance on Russian fossil fuels. It admitted that existing coal facilities may have to be used for “longer than initially expected”. The report highlights the importance of energy savings, the diversification of energy imports and speeding up “Europe’s clean-energy transition”.
Oil and gas producers continued to hit back at calls for a windfall tax on their profits, arguing the industry is already paying more tax following recent rises in the crude oil price. Offshore Energies UK (OEUK), which represents the sector, said producers are on course to pay £7.8bn in UK tax this year, up from £3.1bn last year.
The price of wheat jumped after India banned the export of the staple food. The export ban comes after a heatwave hit India's wheat crops, taking domestic prices to a record high. India's government said it would still allow exports backed by letters of credit that have already been issued, and to countries that request supplies "to meet their food security needs".
Saudi Aramco posted its highest profits since its 2019 listing as oil and gas prices surged following the invasion of Ukraine. The state-controlled energy giant saw an 82% jump in profits, with net income topping $39.5bn in the first quarter.
Renault’s Russian operation was nationalised. The carmaker said it is selling its majority stake in Avtovaz, following pressure over its continued presence in the country. It will sell its 68% interest to a Russian science institute, while its shares in Renault Russia will go to the city of Moscow. It was the first Russian nationalisation of a major foreign business since the invasion of Ukraine.
McDonald's is selling its restaurants in Russia to one of its current local licensees, who will rebrand them under a new name. This will end more than three decades of the "Golden Arches" in the country, which was one of the first western companies to enter the market following the collapse of the Soviet Union.
China and Covid-19
Shanghai has set out plans for the return of a more normal life from 1st June and the end of a strict Covid-19 lockdown that has contributed to a sharp slowdown in China’s economic activity and hit global supply chains and boosted inflation. Deputy mayor Zong Ming said the reopening would be carried out in stages, with restrictions on movement remaining in place until 21st May to prevent a rebound in infections before a gradual easing. The full lockdown of Shanghai and curbs on hundreds of millions of consumers and workers in dozens of other cities have hurt retail sales, industrial production and employment, adding to fears the Chinese economy could shrink in the second quarter. Indeed, data is now showing the detrimental effect of the policy on its economy.
Chinese industrial production fell by 2.9% year-on-year in April and retail sales shrank 11%. China's jobless rate also rose to 6.1% in April, the highest level since the 6.2% peak seen in the early part of the Covid-19 pandemic in February 2020.
UK inflation hit its highest rate in 40 years as higher energy bills, exacerbated by the war in Ukraine, pushed the annual level up to 9% in April, up from 7% in March. The Bank of England (BoE) expects the CPI measure of inflation to rise further, hitting 10.2% in October. BoE governor Andrew Bailey told MPs that the UK faces an “apocalyptic” rise in food prices because of the war in Ukraine, which has disrupted exports from the country. Mr Bailey said he was “very uncomfortable” because rises in inflation were being driven by external shocks, particularly the war and supply-chain issues caused by continuing strict Covid-19 lockdowns in China. If anyone doubts the need for advanced countries to take inflation seriously, they should look at those countries that have not.
UK retail sales rose in April driven by strong food store sales, especially alcohol and tobacco. The surprise jump of 1.4% in sales volumes followed a fall of 1.2% in March and means that sales remain above pre-Covid levels. However, over the three months to the end of April sales overall edged down by 0.3%. A separate survey also indicated that consumer confidence in May fell to its lowest level since the data started being collected in 1974.
The impact of rising prices on consumers was underscored in earnings reports from US retail bellwethers. Target shares plunged by a quarter after management said rising costs would hit its profits and Walmart, the world’s largest brick-and-mortar retailer, also saw its shares plunge after it cut its earnings guidance. This raised fears that companies are struggling to pass higher prices on to already-squeezed consumers.
Companies warned of further price rises ahead. Royal Mail warned it was facing "significant headwinds" from rising costs and the price of parcel delivery and stamps were likely to rise again. Earlier this year, the company upped the price of first-class stamps by 10p to 95p and second-class stamps by 2p to 68p. Plane ticket prices will also rise this summer due to high demand for European beach holidays, Ryanair chief executive Michael O'Leary said. He said the airline's lower fares were currently driving an increase in passenger numbers, helping the company's recovery from the pandemic, but demand was high and prices would rise by a "high single-digit per cent".
In a phone call with US National Security Adviser Jake Sullivan, China's top diplomat Yang Jiech warned that increased support from the US for Taiwan could lead to a "dangerous situation." US President Joe Biden is visiting allies in the region this weekend to coordinate on security threats.
Canada says it will ban two of China's biggest telecom equipment groups – Huawei and ZTE – from working on its 5G phone networks. Industry minister Francois-Philippe Champagne said the move will improve Canada's mobile internet services and "protect the safety and security of Canadians". The long-expected announcement means Canada joins the UK, US, Australia and New Zealand in putting restrictions on the companies. It is the last country in the “Five Eyes” intelligence-sharing group to do so.
Mergers & acquisitions
Elon Musk has said his $44bn deal to buy Twitter may be in jeopardy due to a disagreement over the number of fake accounts on the social media platform. Mr Musk tweeted that the deal "cannot move forward" unless Twitter backs up its claims that less than 5% of daily users are fake or spam accounts.
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.