Last Week in the City: Equities ease after European high

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook for the week ending 16 July 2021.

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  1. Garry White

The pan-European Stoxx 600 index hit a record high on Monday, but equities weakened over the week as concerns over inflation and the spread of the Delta variant of the Covid-19 virus remained a drag on sentiment. Nevertheless, the UK will remove most restrictions relating to the pandemic on Monday 19 July, although foreign travel remains difficult.

The FTSE 100 -1.0% over the week and the FTSE 250 was -1.4% by mid-session on Friday.

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Covid-19

Monday is “Freedom Day” when the UK will lift most of the restrictions introduced to halt the spread of the Covid-19 virus following the rapid rollout of its vaccination programme. However, although the legal mandate to wear a mask will be dropped some retailers such as J Sainsbury, Tesco and Waterstones will “encourage” people to wear a face-covering on their premises. Investment bank Goldman Sachs will also require mask-wearing in its offices.

A group of major travel businesses including Ryanair, IAG-owned British Airways, travel business Tui and Manchester Airports Group have launched legal action against the government over its travel restrictions. They want more transparency over how the government takes decisions on Covid-19 travel rules. In particular, the companies want to know how the government assesses the threat in destination countries. Airline shares were hit once more this week after the UK government announced that the Balearic Islands of Majorca, Menorca and Ibiza would be added back onto its “amber list” of travel destinations.

Tedros Adhanom Ghebreyesus, the head of the World Health Organisation, acknowledged it was premature to rule out a potential link between the Covid-19 pandemic and a laboratory leak, and said he was asking China to be more transparent as scientists search for the origins of Covid-19.

Economics

Federal Reserve Chair Jerome Powell gave a two-day testimony to the US Congress. He said that the US economy was "still a ways off" from levels the central bank wanted to see before tapering its monetary support. There had been speculation that the Fed would start tapering its asset purchases at its July meeting. Addressing inflationary concerns, he reiterated his view that recent price rises were associated with the country's post-pandemic reopening and inflation will eventually fade. US data showed consumer prices increased by the largest amount in 13 years during June.

The UK inflation rate hit 2.5% in the year to June, the highest for nearly three years. The Consumer Prices Index measure of inflation rose from 2.1% in May, driven by higher food and fuel costs. The rate is higher than the Bank of England's 2% inflation target for a second consecutive month. A dip is forecast in July, but inflation is expected to move higher later this year. However, any rise is expected to be temporary due to a stronger pound and a large amount of spare capacity in the economy.

The UK unemployment rate dropped in the latest quarter as the easing of pandemic-related restrictions continued to feed a gradual economic recovery. Between March and May, the unemployment rate fell 0.2 percentage points to 4.8%, while the employment rate was up 0.1 percentage point at 74.8%.

Central banks are currently talking a lot about climate change – but the thing they worry about the most is inflation. We look at their inflationary worries here.

Geopolitics

The US tightened the screws on companies doing business in China's Xinjiang province. American firms that still have supply chain and investment ties in the region were told they "could run a high risk of violating US law. The Chinese "government is perpetrating genocide and crimes against humanity in Xinjiang," US Secretary of State Antony Blinken said.

US President Joe Biden issued a significant Executive Order on 9 July, pledging to strengthen market competition to lower prices, increase choice, raise low wages and break cartels. We look at Mr Biden’s desire for lower prices and higher wages here.

Environmental, social and governance (ESG)

The European Commission unveiled a broad set of proposals aimed at driving the European Union (EU) to its targeted ambition to cut emissions by 55% by 2030, compared to 1990 levels. The proposals span policies across energy, land use, transport and taxation, as well as those aiming to ensure a socially fair transition. The 2030 target was initially proposed in September 2020 by European Commission President Ursula von der Leyen, raising the EU target from 40%. It said this will put the bloc on schedule for 2050 climate neutrality.

Technology

G20 finance ministers backed a "historic" plan that will see multinational companies pay their "fair share" of tax around the world. The agreement is a result of controversial tax practices at technology companies such as Amazon and Facebook, which shift profits to low tax jurisdictions. The plan to battle tax avoidance puts in place a minimum global corporate tax rate of 15% and 132 countries have signed up to the framework so far.

Banking and payments app Revolut became the most valuable British fintech firm on record after a fresh funding round pushed its valuation to $33bn. The company, founded by the former Lehman Brothers trader Nik Storonsky in 2015, raised $800m from new investors Tiger Global Management and the major Japanese investment group SoftBank, which now hold a near 5% stake in the business. It means the London-headquartered company is worth $33bn, six times higher than last year, when it was valued at $5.5bn. Losses almost doubled last year to £207,875.

Taiwan Semiconductor Manufacturing Co (TSMC) hinted that plans to build new factories in the US and Japan could be expanded, as concern about the concentration of chipmakers in Taiwan mounts. It will also expand production capacity in China and did not rule out the possibility of a "second phase" expansion at its $12bn factory in Arizona. It is also looking at building a wafer fabrication plant in Japan. While the world's largest contract chipmaker posted record quarterly sales and forecast higher revenue for the current quarter, investors took profits. Garry White looks at the geopolitical significance of the semiconductor sector here

Mining & commodities

Oil prices slipped as investors braced for increased supplies after a compromise deal between leading OPEC producers. US fuel reserves also rose, raising concerns over demand in the world's largest consumer.

The price of copper and other metals eased after China declared it will keep its economic operations within a reasonable range over the next 18 months and take “comprehensive measures” to ease rising commodity prices. Giving an outlook for the second half of 2021 and next year at a meeting with economic experts and entrepreneurs on Monday, Premier Li Keqiang said China would maintain continuity and stability in its macro policies and would not resort to flood-like stimulus measures.

Autos

Stellantis has said it will invest more than €30bn in electric vehicles between now and the end of 2021. Stellantis is the world’s fourth-largest carmaker, formed in January by the merger of Italian-American group Fiat Chrysler and France's PSA. It aims to make the total cost of owning an electric vehicle equal to that of a petrol-driven model by 2026. The global car industry is currently undergoing major surgery as consumers sit on the sidelines watching the structural shift to electric vehicles. We look at the climate crisis in the auto sector here.

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