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UK inflation hits ten-year high

Last Week in the City provides a round-up of the market movements and the global investing outlook for the week ending 19 November 2021.

| 6 min read

A strengthening pound following the revelation that UK inflation had jumped to a ten-year high dampened the performance of the FTSE 100. Most companies listed in Britain’s blue-chip index are multinationals operating globally, so sterling’s rise will reduce sales and profit figures when they are converted into pounds for reporting purposes.

Inflation soared to 4.2% in October – ahead of City economists’ forecasts and more than twice the Bank of England’s 2% target – as rising energy bills continue to put pressure on household finances.

  • 1.4% FTSE down
  • 4.2% inflation rose

The blue-chip FTSE 100 index was down 1.4% over the week with the more UK-focused FTSE 250 0.3% lower.

Covid-19

The latest surge in Covid-19 infections is resulting in drastic measures being taken in Europe. Austria has announced a new nationwide lockdown as a record virus spike threatens to overwhelm the country’s health care system. Germany’s crisis is getting worse, setting up restrictions on Christmas gatherings, while Hungary recorded its highest level of cases. New lockdown restrictions in the Netherlands led to rioting. The UK government said it does not yet plan to introduce any further restriction on movement but is monitoring the situation.

Economics

UK Inflation surged in October to a 10-year high, with rises in the cost of living now more than double the target set by the Bank of England. The Consumer Prices Index rose by 4.2% in the 12 months to October, up from 3.1% in September. This was ahead of a consensus view of 3.9%. The surge was mainly due to higher fuel and energy prices but the cost of second-hand cars and eating out also rose, the Office for National Statistics said. The Bank of England says it may have to raise interest rates in the "coming months" to tackle rising prices.

Consumers concerned by shortages because of global supply-chain problems have started Christmas shopping early. UK retail sales rose 0.8% in October, following no growth in September, according to the Office for National Statistics. Clothing sales reached their highest level since the start of the pandemic, said the ONS.

The Japanese government approved a record stimulus package, including cash handouts and aid to ailing businesses, as it aims to help the economy out of the doldrums worsened by Covid-19. Do its demographics make it a special case?

Environmental, Social & Governance (ESG)

Politicians hailed the end of the United Nations COP26 climate-change conference in Glasgow, resulted in the completion of the Paris Agreement rulebook and kept the Paris targets alive, giving us a chance of limiting global warming to 1.5 degrees Celsius.

COP26 demonstrated that hitting emissions targets needed to limit global warming will be tough. Fossil fuels will be with us for many years, but green themes have received a further boost.

Geopolitics

Chinese President Xi Jinping and US President Joe Biden held their first virtual summit. The talks are the most substantial since Mr Biden took office in January. Both sides emphasised the two men's personal relationship and the summit was an attempt to ease tensions. However, the two men spent a considerable time discussing Taiwan, according to the US National Security Advisor Jake Sullivan. President Xi warned that encouraging Taiwanese independence would be "playing with fire". The US has pledged to help Taiwan defend itself in the event of an attack. Former US Secretary of State Henry Kissinger said he doesn’t foresee a Chinese military invasion of Taiwan in the next decade, though it’s “perfectly possible” that China will seek to weaken the island’s status.

President Biden said he is weighing a diplomatic boycott of the upcoming Winter Olympics in Beijing, meaning the US would decline to send a delegation of government officials.

China is accelerating plans to replace American and foreign technology, with reports suggesting it was “quietly empowering a secretive government-backed organization to vet and approve local suppliers in sensitive areas” that range from cloud technology to semiconductors. The Information Technology Application Innovation Working Committee has now been entrusted by Beijing to help set industry standards and train personnel to operate trusted software.

China’s President Xi Jinping has now attained a similar status to Chairman Mao. He is now deemed a living historical figure and the people’s wise and trusted thought leader. But a reformer he is not.

Commodities

Royal Dutch Shell unveiled a plan to move its headquarters to the UK as part of proposals to simplify the company's structure. The oil giant will ask shareholders to vote on shifting its tax residence from the Netherlands to the UK and to scrap its dual share structure in favour of just one class of shares to boost "the speed and flexibility" of shareholder payouts. Its chief executive, Ben van Beurden, will relocate to the UK if the plan is approved.

President Biden’s push for major oil-consuming nations to release crude from their reserves is showing some signs of success. China announced it was set to tap stockpiles, with the announcement sending the price of crude lower.

Technology

A group of US states is investigating how Meta’s Instagram targets children. The group is made up of both Democrat and Republican states and will examine whether Instagram and Facebook's parent company Meta has broken consumer protection laws. The probe comes after a company whistle-blower testified that the company knew its products can harm children.

Amazon will stop accepting UK-issued Visa credit cards issued from 19 January. The tech giant blamed high transaction fees but said Visa debit cards would still be accepted. Visa said it was "very disappointed that Amazon is threatening to restrict consumer choice in the future". Amazon said: "The cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers."

Alibaba shares have slumped in Hong Kong after the Chinese online retail giant warned of a slowdown in consumer spending. The company forecast that its annual revenue would grow at the slowest pace since its stock market debut in 2014.

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UK inflation hits ten-year high

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