Last Week in the City: Everyone’s talking about inflation

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook for the week ending 21 May 2021.

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  1. Garry White

Concerns about the outlook for inflation in major economies resulted in a turbulent week in global markets, but these worries calmed towards the end of the week.

Economists are still trying to ascertain what will happen to inflation in the next few years and what that might mean for central bank policy. The main worry is that the Federal Reserve will be forced to raise interest rates too soon to curb sharp rises in prices, stopping the economic recovery in its tracks. However, a fall in the oil price towards the end of the week helped market participants overcome the worst of their fears – and riskier assets rallied on Friday.

Major UK indices ended the week slightly lower after the inflation rollercoaster resulted in a volatile week’s trading.

Covid-19

The Indian Covid-19 variant could pose a "serious disruption" to the easing of lockdown restrictions in England on 21 June, according to Boris Johnson. The Prime Minister said that if the mutated strain was found to be "significantly" more transmissible there could be "some hard choices". The wait between Britons receiving the two jabs was cut from 12 weeks to eight for the over-50s and clinically vulnerable because of concerns over this particular variant. Surge testing is already taking place in 15 areas across England, including Bolton, Blackburn, London, Sefton and Nottingham.

Nevertheless, the UK economy is enjoying an “unprecedented growth spurt” as it emerges from lockdown, with the private sector signalling its fastest output growth for more than two decades. Data from IHS Markit indicated that hotels, restaurants and other consumer-facing services were seeing the strongest demand. Factory orders surged at record pace as the global demand for goods returned and the service sector is reporting near-record growth.

The leading Asian economies handled the first surges of the Covid-19 virus well. However, with vaccine rollout slow, outbreaks of infection continue to cause problems across the continent. We take a look at Asia’s new challenges here.

Last year was devastating for the global economy, but the crisis has forced the world to be re-imagined. Amid the tragedy, changes are being made that should make the future better for all. Garry White considers how the pandemic will force change for the better here.

Economics

Britain’s annual inflation rate more than doubled in April, boosted by rising energy and clothing costs. The jump to 1.5% from 0.7% in March, means consumer prices are rising at their fastest rate since March 2020 at the outset of the pandemic. However, the jump largely reflected a recovery in prices from low levels at the start of the pandemic, the Office for National Statistics said. Inflation is still well below the 2% targeted by the Bank of England.

Whenever investors have a rush of doubt over inflationary pressures or the possibility the Fed might start to reduce its assistance, there are short, sharp sell-offs in riskier assets. We argue this pattern looks set to continue here.

After decades of trying to battle inflation at the end of the last century, the post-pandemic era is seeing a significant change in policy. We look at why Joe Biden wants American wages to go up significantly here.

Things are looking brighter in continental Europe after the Eurozone business growth accelerated at its fastest rate in more than three years during May. There was a strong resurgence in the bloc's service industry, as easing restrictions added to the impetus from an already booming manufacturing sector.

Geopolitics

A ceasefire between Israel and the Palestinian militant group Hamas in the Gaza Strip came into effect, ending 11 days of fighting in which more than 250 people were killed, mostly in Gaza. Both Israel and Hamas claimed victory in the conflict.

The strategic importance of the South China Sea has demonstrated yet again after China issued two protests this week over US naval activity in the region. The US 7th Fleet defended its movements vigorously, accusing Beijing of attempting to assert illegitimate maritime rights at the expense of its neighbours.

The UK and its allies have been “too soft” on China and the World Trade Organisation needs to get tough on Beijing’s unfair trade practices, according to international trade secretary Liz Truss. Questioned by a parliamentary committee, Ms Truss said the UK wanted “to improve our toolkit multilaterally and unilaterally” through putting in new subsidies’ rules for goods such as steel and aluminium.

IPOs

Oatly, the plant-based milk company backed by US celebrities including Oprah Winfrey and Natalie Portman, saw its shares soar on its stock market debut. The growing popularity of vegetarianism and veganism has boosted the market for alternative food products, supporting investor appetite for companies such as Beyond Meat, which launched its IPO in May 2019.

Office-sharing start-up WeWork posted a $2bn quarterly loss ahead of its floatation after its business was hit hard by the Covid-19 pandemic. The company's first attempt to go public collapsed in 2019 over concerns about its business model and co-founder Adam Neumann's leadership style. The company has undergone significant restructuring since its first, failed attempt to come to market.

Cryptocurrency

It was another bad week for digital-coin evangelists, with the price of Bitcoin sliding sharply after China imposed fresh restrictions on the cryptocurrency market. Beijing banned banks and payment processors from providing services related to crypto transactions. It also warned investors against speculative trading of digital coins. The Bitcoin fell sharply in the prior week after Tesla said it would no longer accept the currency because of the environmental impact of digital mining, which is significantly powered by “dirty” coal plants in places such as China.

Technology

The US Treasury Department offered to accept a global minimum corporate tax of at least 15% during international negotiations, a rate significantly below its proposed 21% minimum for US multinational firms. The department said the proposal was made during an Organization for Economic Cooperation and Development (OECD) tax steering group meeting on base erosion and profit shifting. The group is aiming to reach a broad agreement this summer to rework rules for taxing multinational corporations and big technology companies such as Alphabet and Facebook.

A brief visit to Luton by Tesla’s billionaire founder Elon Musk started rumours of a potential new factory site for the group’s electric vehicles in the UK. Press reports said that regional authorities – including those in Teesside and the West Midlands – were given just 48 hours to prepare bids for a 250-hectare site, without being told which company was involved in the talks.

Mining & commodities

After hitting a series of new record highs this year, iron ore prices fell after China sought stricter oversight of commodity markets. China’s cabinet vowed to strengthen its management of commodity supply and demand to curb “unreasonable” price increases and protect consumers.

Retail

UK retail sales volumes soared 9.2% in April, as lockdown measures were eased and non-essential shops were permitted to reopen. Sales of clothing jumped by nearly 70% month-on-month, the Office for National Statistics said.

People staying in during pandemic lockdowns sparked a boom in the DIY industry. B&Q owner Kingfisher raised its annual profit guidance. For its first-quarter period ending 30 April, Kingfisher said total sales came in at £3.44 billion, marking a 60% year-on-year increase. Sales at stores open for more than a year jumped 64.2% compared with the equivalent period of 2020. It also represented a 22.5% increase from the first quarter of 2019 – well before the Covid-19 pandemic forced people to stay home.

Transport

The UK rail system will undergo another major shake-up. The network will be rebranded ‘Great British Railways’ as part of a reorganisation intended to simplify the widely-criticised franchise system and rebuild passenger numbers following the pandemic. As well as taking responsibility for track and stations, the new body will also be in charge of ticketing, timetables and network planning. This latter piece of news resulted in a sharp fall in shares of train-and-bus ticket group Trainline.

Travel to amber list countries from the UK is "absolutely legal", easyJet boss Johan Lundgren said, after the government advised people not to go to those countries on holiday. Mr Lundgren said the government stance was "very confusing" and frustrating for passengers, and testing was costly.

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