Last Week in the City: UK rates to fall below zero?

Garry White, Chief Investment Commentator, provides a round-up of the market movements and the global investing outlook this week ending 18 September.

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  1. Garry White

A sharp rise in new infections of Covid-19 in the UK and Europe hit UK shares this week, with bank shares especially weak. Lenders were hit after the Bank of England said it has commissioned a study into the impact of negative interest rates. Sending rates below zero, in theory, could encourage banks to lend more money, a move that should help boost the economy.

In a move that is not exactly popular with the Trump administration, the World Trade Organisation ruled that the tariffs imposed on Chinese goods in 2018 by Washington were "inconsistent" with international trade rules. Oil prices rallied after sector analysts pointed to a potential supply crunch. Goldman Sachs said it expected the crude market would fall into a deficit of 3 million barrels per day by the fourth quarter of 2020.

The FTSE 100 was little changed over the course of the week by mid-session on Friday, with the FTSE 250 down 0.2% over the same period.

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Covid-19

The number of confirmed Covid-19 infections worldwide is almost at 30 million. More than 942,000 people have died since the infection emerged in China late last year.

The World Health Organisation (WHO) warned Europe over a “very serious” Covid-19 surge that it said should serve as "a wake-up call”. Regional director Hans Kluge said in the past two weeks the number of new cases had doubled in more than half of European member states. "We have a very serious situation unfolding before us," Mr Kluge said.

Another national lockdown could be imposed in the UK as a "last line of defence" against rising Covid-19 infections, Health Secretary Matt Hancock said. The cabinet minister refused to say how close the UK was to another wave of country-wide restrictions but said the government would "do what is necessary to keep people safe". British hospital admissions with the virus are now doubling every eight days.

China's government says it may have a Covid-19 vaccine available publicly by November, but there was some scepticism about their claims. Hundreds of thousands of Chinese have already been injected with experimental vaccines, with at least three companies in the final stages of clinical trials in the country.

US President Donald Trump and the head of the Centers for Disease Control and Prevention (CDC) on Wednesday disagreed about when a Covid-19 vaccine would become widely available. Trump has said one could initially be available by the Nov. 3 election, while the CDC director said vaccines were likely to reach the general public around mid-2021.

The number of British people visiting restaurants, cafes and pubs fell for the first time since early July following the end of ‘Eat Out to Help Out’, a government subsidy for half-price restaurant meals. In total, 30% of British adults had been out to eat or drink between 9 and 13 September, down from 38% two weeks earlier.

More people are returning to their workplaces. The Office for National Statistics (ONS) said that 62% of adults reported commuting to work last week. That compares with 36% in late May, soon after the ONS began compiling the figures during lockdown. The government has been encouraging workers to return to offices to help revive city centres.

Economics

The Bank of England took another step towards negative rates. No interest-rate changes were made at the latest meeting, but minutes of the previous meeting said the Monetary Policy Committee had been briefed on the Bank's plans “to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point”. The Bank of England and the Prudential Regulation Authority “will begin structured engagement on the operational considerations” of the move in the final quarter, the minutes said.

Central banks have had an attack of prudence. They rescued markets from despair in the third week of March but they still need to provide guidance on how they are going to deal with the recovery. We look at the issues in this week's article, Central banks have an attack of prudence.

Geopolitics

With the US Presidential election just weeks away, the question whether Democrats or Republicans will have a majority in the House of Representatives and Senate matters to markets. We look at the race for the White House in this week's article, What will the US elections do to markets?

Global trade looks likely to be set for a period of substantial flux due to Donald Trump’s trade war, but others are also changing the way they do business. Germany’s Economy Minister Peter Altmaier said the European Union must diversify its trade relations, become less dependent on Asian suppliers in certain areas such as medical precursors, and develop its own value chains within the 27-member bloc.

The World Trade Organisation (WTO) ruled that tariffs the US imposed on Chinese goods in 2018, triggering a trade war, were "inconsistent" with international trade rules. The WTO said the US did not provide evidence that its claims of China's unfair technology theft and state aid justified the border taxes. Chinese officials welcomed the ruling, but the US said it showed that the WTO was "completely inadequate" to the task of confronting China.

Human rights may be about to accelerate the trade war between the US and China. As Washington’s China trade hawks consider acting on the Asian nation’s alleged human rights abuses in Xinjiang, tensions between Beijing and Washington may worsen still. Garry White looks at the looming clash in this week's article, Human rights may be about to accelerate the trade war.

Brexit

Press reports suggested EU banks will be allowed to use the City of London clearing houses for Euro derivatives until June 2022. An extension of this length would reassure the City, but the negotiating position remains extremely fluid.

US President Donald Trump's special envoy to Northern Ireland, Mick Mulvaney, warned against creating a "hard border by accident" on the island. Prime Minister Boris Johnson is proposing new legislation that would break the Northern Ireland protocol of the Brexit divorce treaty that seeks to avoid a physical customs border between Northern Ireland and the Republic. "The Trump administration, State Department and the US Congress would all be aligned in the desire to see the Good Friday Agreement preserved to see the lack of a border maintained," Mr Mulvaney said.

Technology

After weeks of speculation, US chip giant Nvidia confirmed that it intends to buy chip design giant Arm Holdings for a total of up to $40bn from existing owner SoftBank, which bought the company for $32bn in 2016. The boards of all three parties have approved the outline of the deal. Nvidia said that Arm’s offices in Cambridge will expand, and that the company intends to set up “a new global center of excellence in AI research at Arm’s Cambridge campus.”

Energy

Brent crude prices rallied by more than 9% by mid-session on Friday, to trade just below $43.50 a barrel. The rally came after a 6% fall in the previous week, with the price boosted by Saudi Arabia urging allies to stick to production quotas – as well as banks such as Goldman Sachs predicted a future supply deficit.

Property

Commercial property is no longer the solid investment it once was, with upwards-only rent reviews and more reliable income flows than dividends on shares. We look at the state of property investment after Covid-19 in this week's article, The state of property investment after Covid-19.

Retail

UK retail sales grew for the fourth consecutive month since April’s lockdown last month, but the rate of growth slowed markedly. Sales volumes increased by 0.8% compared to the previous month, the Office for National Statistics (ONS) said, down from the 3.7% growth over July or the surges of 12.1% and 13.9% seen in May and June. One important factor was increased spending on home improvements, with sales volumes at household goods stores now up by 9.9% when compared with February.

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