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US earnings support investor confidence

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 29 October 2021.

| 11 min read

The US stock market continued to make new records, as strong earnings from major companies supported investor confidence. There was good news for carmakers after Ford said the semiconductor shortage had eased, allowing it to move production up a gear. The US’s five largest technology companies also posted earnings. Supply issues are impacting companies such as Apple and a shortage of workers is hitting Amazon – but profits are still growing as the size of their market grew significantly during the pandemic as people turned to technology.

The blue-chip FTSE 100 index was down 0.1% over the week by mid-session on Friday with the more UK-focused FTSE 250 up 1%.

Covid-19

The remaining seven countries on the UK government's Covid travel red list will be removed on 1 November. Fully-vaccinated arrivals from Ecuador, the Dominican Republic, Colombia, Peru, Panama, Haiti and Venezuela will no longer have to quarantine in a hotel. But the red list system will be kept in place and a country could be added back on it if cases rise there.

Wales is reportedly set to announce changes in its Covid-19 restrictions as a result of the rising case numbers across the UK. The Welsh government will be encouraging people to work from home if possible, and also insisting that anybody in a household with somebody who has tested positive also isolates until they have a negative PCR test.

Joe Biden signed an order imposing new vaccine requirements for most foreign national air travellers and lifted severe travel restrictions on China, India and much of Europe. The new rules come into force on 8 November.

The US Food and Drug Administration is considering authorising a Covid-19 vaccine for children aged 5 to 11. The vaccine from Pfizer and BioNTech has been available in America to youngsters aged 12 to 15 since May this year.

China has started giving vaccinations to children as young as three, as Beijing’s “net-zero” Covid policy continues to be pressured by fresh outbreaks of the virus.

Russia and Ukraine are enforcing new pandemic-related restrictions at the regional level and pleading with their citizens to get vaccinated. About 30% of Russians and just 16% of Ukrainians have been fully vaccinated as authorities have mismanaged their messaging about the virus.

Heathrow Airport’s management does not expect that air traffic will fully recover until at least 2026, as the number of passengers traveling through Britain's biggest airport are significantly below pre-pandemic levels – despite a pick-up in the past few months as the UK government eased quarantine and testing requirements.

Economics

US economic growth slowed sharply in the third quarter, as the fast-spreading Delta variant of Covid-19 dampened consumer spending. The economy expanded at an annualised rate of just 2% in the three months to September – down from 6.7% in the previous quarter.

China’s central bank injected liquidity into the financial system for a ninth day in the longest run since December as it sought to meet a surge in seasonal demand for cash.

Global bottlenecks are a result of a huge demand spike rather than fundamental problems in the supply chain, the World Trade Organisation chief economist Robert Koopman said. The statement supports the view of central banks, which argue this is a transitory phenomenon.

Autumn Budget 2021 – the impact on personal finances and investments. Rob Morgan rounds up the main developments from Chancellor Rishi Sunak’s Budget.

COP26/Environmental, Social & Governance (ESG)

US President Joe Biden is expected to head to Glasgow without an agreement on measures to combat climate change. Mr Biden's $1.5 trillion-$2 trillion spending plan, aimed at curbing climate change and expanding the social safety net, remains mired in intraparty squabbles, as is a linked $1 trillion infrastructure bill that also includes climate-related measures. On Thursday the president said he and Democrats in Congress have reached a “historic” framework for his sweeping domestic policy package. But he still needs to lock down votes from key colleagues for what’s now a dramatically scaled-back bill.

India, the world's third-biggest emitter of greenhouse gases after China and the United States, rejected calls to announce a net zero carbon emissions target and said it was more important for the world to lay out a pathway to reduce such emissions

Australia – one of world's major coal and gas producers – said it will target net-zero carbon emissions by 2050. However, the statement came with a caveat. Scott Morrison’s government said it will not put this target in legislation, but will instead rely on consumers and companies to drive emission reductions.

Fossil fuel and carbon output is still rising globally. Clearly, we will need coal, oil and gas for some time to come, whatever leaders say at COP26. We look at why carbon is key to the energy transition.

A US House committee will subpoena major oil company executives for documents on what company scientists have said about climate change and any funds spent to mislead the public on global warming.

Geopolitics

General Mark Milley, the US’s highest ranking military officer, has provided the first official confirmation of a Chinese hypersonic weapons test that appears to show Beijing's pursuit of an Earth-orbiting system designed to evade American missile defences. Hypersonics move at speeds of more than five times the speed of sound, making them harder to detect and intercept.

China strengthens socialism: Chinese President Xi Jinping has discovered his inner Chairman Mao and is now actively strengthening the socialist parts of his policy mix; we look at this significant shift.

Autos

Elon Musk is now worth more than ExxonMobil after Tesla became the sixth company in history to be valued by the market at more than one trillion dollars – joining, Amazon, Alphabet, Facebook, Apple and Microsoft. The last two companies in this list are now worth more than $2 trillion, but Facebook shares have fallen to value the embattled social-media group at about $930bn. Shares in Tesla soared after car rental group Hertz emerged from Chapter 11 bankruptcy and made a bold statement of intent by ordering 100,000 electric vehicles from Mr Musk’s car company.

Finally, there was some good news from one of the world’s stalwart carmakers. Ford shares jumped after it reported blockbuster earnings while also raising guidance. The automaker said increased availability of semiconductors during the quarter allowed it to ramp-up production.

Technology

The five largest US technology companies reported quarterly earnings this week.

  1. Facebook is now called Meta. The social-media group is rebranding to represent its new focus on building the "metaverse," a shared virtual environment that it believes will be the successor to the internet. The name change comes amid criticisms from lawmakers and regulators over its market power and the policing of abuses on its services. Facebook has been accused of unethical behaviour by a former employee, who leaked a number of documents and reiterated her accusations in the House of Commons this week. Whistle blower Frances Haugen claims that Facebook put profit before user safety. Founder and chief executive Mark Zuckerberg denies the accusations and said the documents released are selective and misrepresent the company. The group posted better-than-expected earnings for the third quarter.
  2. Apple’s revenue fell short of Wall Street expectations in its fourth quarter, which chief executive Tim Cook attributed to larger-than-expected supply constraints on iPhones, iPads, and Macs. Mr Cook said supply issues had cost the company $6bn.
  3. Google parent company Alphabet posted strong third-quarter numbers that exceeded Wall Street’s expectations, as the core advertising business continued to drive growth. Profits hit a record.
  4. Amazon shares fell after its earnings report after the company reported weaker-than-expected results for the third quarter and delivered disappointing guidance for the critical holiday period. Earlier in the week, UK spy agency GCHQ reportedly awarded a contract to the web hosting business of Amazon to host classified material. The deal is part of a plan to boost the use of data analytics and artificial intelligence (AI) in espionage. GCHQ refused to comment on the deal with Amazon Web Services.
  5. Microsoft reported a stellar set of quarterly numbers, with revenue growth of more than 20%. The strength was broad based, but its cloud data-storage business remained the lead performer, with its Azure business as the standout.

The pandemic brought many new customers into the digital space. Although there are supply and staffing issues hitting the sector, its larger customer base is still boosting earnings. We look at the sectors and its challenges in this article, Digital companies carry on growing despite headwinds.

Space

Blue Origin, the space tourism company owned by Amazon founder Jeff Bezos, unveiled plans to launch a commercial space station. The group expects the space station – which it describes as a “mixed-use business park” and will be called Orbital Reef – will be operational by the end of the decade. Joining forces with Blue Origin to build the space station are Sierra Space and Boeing.

Garry White argued that humanity’s colonisation of space is about to take-off in an arrtical published in January.

Property

Embattled Chinese developer Evergrande reportedly made an interest payment for an offshore bond before a grace period expired on Friday. The property developer, which avoided a default last week by securing $83.5m for the last-minute payment of interest on a bond, needed to make $47.5m in coupon payments to bondholders by Friday. A failure to pay would have triggered cross-defaults on all of the company's $19bn worth of bonds in international capital markets.

Another Chinese developer has defaulted on its debt payments. Modern Land missed a bond payment, contributing to concerns about wider effects of the debt crisis at embattled property behemoth Evergrande and dampening sentiment in the wider sector.

Retail

After a five-month negative run of official retail sales data, the Confederation of British Industry (CBI) noted that there were reasons to be positive. The trade body said retail sales growth in the UK picked up in October. Its retail sales balance rose to 30% from 11% in September. The indicator measures the proportion of retailers saying sales increased, minus those reporting a fall in sales. The expectations balance for November also improved, to 35% from 29% in October.

The owner of Ikea bought Topshop’s former flagship store on Oxford Street – once regarded as the jewel in Sir Philip Green’s retail empire – for an estimated £378m. This will complete the sell-off of the assets of the Arcadia Group empire, which collapsed into administration in November last year. The Swedish home furnishing group said it planned to open a store in the building in autumn 2023, focusing on home-furnishing accessories. It’s full range of furniture will be available to buy for home delivery.

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US earnings support investor confidence

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