European Central Bank slows pandemic stimulus; US jobless claims at pandemic low – as it happened
Time to wrap up....
The European Central Bank has tapped the brakes on its pandemic stimulus programme, deciding to buy bonds at a slightly slower pace in the next three months.
But, the ECB insisted that the move wasn’t a ‘tapering’, as the size of PEPP is unchanged. It also revised up its growth and inflation forecasts for this year.
Jobless claims in the US have hit a new pandemic low, with firms keen to hold onto workers as they struggle to fill vacancies.
After a wobbly day, the UK’s FTSE 100 index has ended at its lowest close since late July.
The blue-chip index ended the day 1% lower at 7024 points, having earlier dropped below 7,000 points for the first time since mid-August.
Tech stocks, consumer non-cyclicals, miners and healthcare were the weakest sectors, followed by energy, financials and utilities.
The pound strengthened against the dollar, up three-quarters of a cent at $1.385 -- which will have weighed on multinational stocks.
European markets staged a recovery though, with small gains in Frankfurt and Paris helping the Stoxx 600 to finish flat.
Michael Hewson of CMC Markets sums up the day:
European markets started the day very much on the back foot today as concerns over the growth outlook and higher prices and wages initially weighed on valuations, with the DAX hitting its lowest levels since 30th July, before rebounding in the aftermath of today’s ECB rate decision, which saw the central bank only modestly slow its PEPP program.
The FTSE100 on the other hand has shown little sign of a similar recovery off its lows, slipping towards the 7,000 level, and while it has recovered a little it is still the worst performing market in Europe today, while both the DAX and CAC40 have returned to positive territory.
Over the past 24 hours we’ve seen China factory gate prices hit a 13 year high of 9.5% in August, while yesterday’s Fed Beige Book survey showed that US economic activity was decelerating, raising concerns that rising prices and slower growth, will coincide with a slowing of stimulus from global central banks. Energy prices across Europe have also been spiking adding to the uncertain mood.
The travel and leisure sector has been front and centre today after easyJet announced it was looking to raise another £1.2bn from a fully underwritten rights issue, sending the shares sharply down and back to its January lows as shareholders face having to fork out yet more extra cash.
This decision can be looked at in any number of ways, but it appears that management want to be able to ride out what could be a difficult winter for the wider sector, and while they are spinning it as a way to bolster the balance sheet to take advantage of possible expansion plans, it hasn’t gone unnoticed that management also painted a weaker outlook for Q4 and Q1 next year.
Heads-up: The South China Morning Post have updated their story about China’s clampdown on gaming -- saying regulators have “temporarily slowed their approvals of new online games” (not suspended, as it said before...)
Here’s a handy thread on the US jobless claims, from Oxford Economics’ Greg Daco:
Richard Flax, chief investment officer at Moneyfarm, says the ECB gave a “cautious but realistic message” today - as it reduced the pace of its bond-buying stimulus (but kept the full package at €1,850bn)
It’s clear that the ECB wants to remain as flexible as possible in using its arsenal to support the economy, even if that means tolerating inflation being above 2% for a short period. In this context, inflation expectations matter. For the moment, ECB staff forecasts appear well-anchored, at 1.5% for 2023.
There were no unwelcome surprises at the conference. On the contrary, we found the upward revisions of the growth projections for 2021 an encouraging sign of confidence in the economic recovery. It’s unsurprising that supply-chain bottlenecks were highlighted as a threat to both inflation and economic growth but, for now, Central Banks can do little about them.
The ECB is also not alone in taking this stance. This is the direction dictated by the Fed and, indeed, other central banks globally. The Fed, the Bank Of England and other smaller central banks have confirmed the continuation of accommodative policy, while beginning to set out the path towards a gradual exit. Markets not only seem unfazed but are aligned with the confident messages coming from the monetary authorities.
Wall Street calm
The New York stock market has opened calmly, despite the concerns over slowing growth that hit shares earlier.
The Dow Jones industrial average is up 130 points, or 0.37%, at 35,161.
The tech-focused Nasdaq is also picking up, gaining 50 points to 15,337.
The latest drop in jobless claims may have reassured investors that the US labor market isn’t stumbling.
And the ECB’s decision to slow its bond-buying, and lift its growth forecasts, may also show that policymakers are confident about the recovery.
Edward Moya of OANDA says:
US stocks pared losses after weekly jobless claims hit a fresh pandemic low and as the ECB turns optimistic enough to moderate their PEPP buying.
The S&P 500 index won’t make a major move unless inflation heats up or if delta variant concerns ease further and the economy can resume reopening. The global economic recovery will be led by Europe in the third quarter and that should be very positive for European equities.
US jobless claims at new pandemic low
The number of Americans filing new claims for unemployment benefit has hit a new pandemic low, despite the slowdown in hiring last month.
There were 310,000 initial claims for jobless support last week, a drop of 35,000 compared with the previous seven days.
That’s the lowest level for initial claims since March 14, 2020 when it was 256,000 -- just as the first wave of Covid-19 hit the US economy.
It suggests that the labour market remains firm, despite US companies only adding 235,000 new jobs in August, down from over 1 million in July.
Claims may have been still lower except for a substantial bump in Louisiana, which was hammered by Hurricane Ida and still has nearly 250,000 homes and businesses without power.
Stripping out seasonal adjustments, there were 284,287 new jobless claims, down 8,005 on the previous week.
Robert Frick, corporate economist at Navy Federal Credit Union, says US companies are holding onto their workers (with the number of vacancies hitting a record in July, at nearly 11m)
“Unemployment claims have turned into one of the few bright spots in the job market. The August jobs report disappointed, and yesterday’s JOLTS survey marked record job openings and a continued high level of workers quitting, but the steady drop in claims shows that employers increasingly won’t let go of employees once they have them.
The number of Americans on unemployment benefits is still much higher than pre-pandemic levels, but only by a factor of 50%, versus 400% at the beginning of this year.”
Lagarde: The lady isn't tapering...
Christine Lagarde also channelled Margaret Thatcher to insist that the European Central Bank is not tapering its bond-buying programme, simply buying assets at a slower pace.
Asked why the ECB is reducing its stimulus, given eurozone inflation is seen below target in 2023, Delta variant uncertainties, and signs of slowdown in China, the ECB president replied:
“The lady isn’t tapering,”
...in a nod to Thatcher’s famous declaration in 1980 that “The lady’s not for turning”, when her monetarist policies faced heavy criticism as unemployment rose sharply.
[that literary joke was a pun on the 1948 play The Lady’s Not for Burning]
Lagarde explains that the ECB is recalibrating PEPP for the next three months, based on more favourable financial conditions and the inflation outlook (upgraded today).
“What we have done today ... unanimously, is to calibrate the pace of our purchases in order to deliver on our goal of favourable financing conditions. We have not discussed what comes next.”
Lagarde: recovery builds on success of vaccination campaigns
Speaking to reporters, European Central Bank president Christine Lagarde says:
“The economy rebounded by 2.2% in the second quarter of the year which was more than expected. It is on track for strong growth in the third quarter.
The recovery builds on the success of the vaccination campaigns in Europe which have allowed a significant reopening of the economy.”
Lagarde says the risks to the economic outlook are ‘broadly balanced’.
On the upside, growth could be stronger than expected, if consumers spend more of their savings accrued in the lockdown or if the pandemic eases more rapidly.
But there are also downside risks - such as the possibility that the economic outlook deteriorates if the pandemic worsens.
Lagarde also points out that supply chain problems could last longer than expected, potentially hold back production for longer. Those bottlenecks could also lead to higher-than-expected wage rises, pushing up inflation.
“In conclusion, the euro area economy is clearly rebounding. However, the speed of the recovery continues to depend on the course of the pandemic and progress with vaccinations.
The current rising inflation is expected to be largely temporary and underlying price pressures will build up gradually.”
ECB lifts growth and inflation forecasts
The ECB has also lifted its growth and inflation forecasts for this year.
It now sees inflation at 2.2% during 2021, up from 1.9% predicted back in June.
However, inflation is still seen dropping below target in 2022 (1.7%, up from 1.5%) and 2023 (1.5%, up from 1.4%).
The ECB also expects a stronger recovery this year -- with GDP expected to rise 5%, up from 4.6% before.
Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank (the parent company of Brown Shipley) says the ECB is right to slow its stimulus programme:
In line with our expectation, the ECB reduced the pace of pandemic bond purchases. Easier financial conditions and progress on the vaccination front justify such a step.
Antonucci also point out that the ECB hasn’t cut the total size of its stimulus -- just the speed at which it pumps money into the eurozone economy by buying assets with new money.
However, this doesn’t mean ‘classic tapering’ in the sense of scaling back the asset-buying to get to zero in due course, a move we think the Fed will likely announce at some point this year.
Rather, albeit more slowly, the ECB looks set to keep buying for a long time, supporting asset markets. This is because the inflation outlook still looks subdued, so the central bank is likely to carry on with its main purchases for an extended period of time. We don’t expect any interest rate hike throughout our forecast horizon.
The euro has nudged slightly higher, up 0.2% against the US dollar to $1.1838.
Ima Sammani, FX Market Analyst at Monex Europe, says:
“The euro enjoyed today’s decision by the European Central Bank to reverse engines and moderately slow down net purchases under the Pandemic Emergency Purchase Programme (PEPP), even though this was widely expected by markets as all signs were pointing to slower purchases. With the economy almost running at full speed again, unemployment falling and inflation running hotter even the dovish Philip Lane couldn’t help but acknowledge the improved outlook as he joined the ECB hawks just a week before the decision in expressing his ease with slowly tightening policy.
“The FX reaction, although present, was mild, with EURUSD failing to shoot above yesterday’s highs before markets turn to the fresh forecasts and press conference starting at 13:30 BST.
Until Lagarde quantifies the reduction in PEPP in the press conference, markets are kept in the dark regarding what the new policy means for the economy. For now, PEPP net purchases are widely expected to fall to €60-70bn, with the emphasis being on the next pieces of purchase data, along with the delivery of the message with the CPI and growth projections.”
The ECB’s move show that policymakers believe the euro area’s recovery is strong enough to endure on less support, says Bloomberg.
Officials also reiterated a pledge to keep the 1.85 trillion-euro program running until March 2022 or later if needed, signaling they’re not yet ready to discuss how and when to end emergency stimulus.
ECB slows PEPP bond-buying: snap reaction
Seema Shah, chief Strategist at Principal Global Investors, says the ECB has taken its “first meaningful step towards tapering” today, by deciding to slow the speed of its bond-buying programme.
Characteristically, it hasn’t tied itself to a specific pace of purchase, instead retaining an element of flexibility which will be helpful in the face of a potential tightening in financial conditions as Fed taper draws near.
“Lagarde will likely insist that this is not tapering and, in fairness, by official definition it isn’t. But certainly it is the first step towards tapering and investors will be listening closely to clues about the eventual wind down of PEPP.
Shah adds that the ECB’s move isn’t a big surprise -- but it needs to avoid tightening policy too quickly (as when it raised interest rates in 2011, during the eurozone crisis).
“In the past week, market focus has shifted from when the Fed would begin to taper to when the ECB would reduce the pace of its purchases, so today’s announcement should not come as a surprise.
Even so, with markets concerned about the risk of a hawkish policy error, Lagarde’s efforts to disconnect bond purchases from rate lift-off will be important in reassuring investors that the central bank isn’t on the verge of making a repeat of the 2011 policy mistake.“
ECB slows pace of pandemic bond-buying stimulus
Just in. The European Central Bank has decided to slow the pace of its pandemic stimulus programme.
Following its latest governing council meeting, the ECB says it has decided to run its pandemic bond-buying programme at a ‘moderately lower pace’.
The move dials down the ECB’s €1.85trn Covid-19 stimulus programme a little; it was launched to support growth after Covid-19 hit the eurozone economy last year.
The ECB says:
Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.
The Governing Council also confirmed its other measures, namely the level of the key ECB interest rates, its forward guidance on their likely future evolution, its purchases under the asset purchase programme (APP), its reinvestment policies and its longer-term refinancing operations.
The PEPP programme had been buying around €80bn of bonds per month -- after the ECB raised the pace back in March.
The ECB also left interest rates at their current record lows.
The ECB has taken this move after inflation hit a 10-year high of 3% in August, above its target of 2%.
Three becomes latest mobile firm to bring back roaming charges
Three is to reintroduce charges for customers who use their phones when travelling in Europe and two dozen other international destinations, the latest of Britain’s biggest mobile companies to do so despite previously saying roaming costs would not return post-Brexit.
Three UK said that a £2 daily charge will apply when customers who have taken out a new contract or upgrade from 1 October use their phones in European countries. However, the charges do not come into effect until 23 May next year.
The company, which follows BT-owned EE and Vodafone in reintroducing the charges, is also introducing a £5 a day charge for customers who use their phones in two dozen countries including New Zealand, Australia and the US, as it also scraps its international free roaming plans.
“The new charge ensures that customers are clear on what they will pay when using their phone in another country and only those who roam will pay for the service,” said a spokesman for Three UK.
“It will also ensure that we can continue investing in our UK network.”
Oxford Nanopore, a startup spun out from Oxford University whose Covid-19 technology was snapped up by the UK government and used to track variants of the virus globally, has announced it intends to float on the London Stock Exchange.
Nanopore’s DNA/RNA sequencing technology is used in biomedical, pathogen, plant and animal scientific research, infectious diseases and food and agriculture sectors.
It says the float will raise money to help it invest in growth opportunities, driven by the ambition to be a global company that “enables the analysis of anything by anyone, anywhere”.
Nanopore’s planned IPO is a boost for the City.
Back in March, we wrote that the float could be one of the largest debuts of the year:
While the company’s current shareholders have recorded its value at just over £2bn, analysts estimate the life sciences company could reach a market value of between £4bn and £7bn when it goes public.
In what the firm describes as a “pivotal year”, Oxford Nanopore’s fortunes have been transformed by the pandemic. Since the outbreak, it has won contracts worth £144m from the UK’s Department of Health and Social Care, all of which were awarded without competitive tender due to the emergency circumstances. The sum dwarfs its 2019 revenues of £52m.
The firm certainly has big ambitions for its sequencing technology.
Dr. Gordon Sanghera, Chief Executive Officer of Oxford Nanopore says:
I believe we are only in the foothills of what is possible, as this knowledge is now starting to translate into ground-breaking ways of using rapid DNA insights that have the potential to provide benefits in infectious disease, cancer management, agricultural optimisation, industrial manufacturing, food safety, and much more. We look forward to working with these true innovators in the years to come.
Looking further ahead, we see the potential for a global Internet of Living Things - a future in which real-time networks of biological sensors can be used to help the broadest of communities. This could include tracking the spread of viruses in people, animals and environments, which could potentially transform public health provision around the world. It could include networks of marine ecology sensors to help us understand the changes brought about by climate change. It could ultimately be a future in which embedded technology in wearable devices provides daily DNA/RNA information, and so critical, personalised health data to those users.
One solution to the problem of hiring, and retaining, workers in a tight labour market is to pay them more.
And coffee chain Costa has announced its staff are getting a 5% pay rise, as it also creates 2,000 new jobs.
PA Media explains:
The chain said its 14,500 employees across the UK will receive the wage increase in recognition of their “commitment and continued passion” during the pandemic.
Costa is also looking to recruit more than 2,000 new workers as it prepares for a busy festive season, with more stores opening and higher consumer demand.
From October, all store staff will receive a pay rise of at least 45p an hour, taking minimum pay to £9.36.
The company’s “Barista Maestros” will see their pay go up by 65p per hour, taking the minimum for these more experienced roles to £10.29.
Top rates of pay, depending on location and experience, will go up to £11.29 an hour from £10.64.
[The National Living Wage is currently £8.91 per hour].
Lloyd’s, the world’s biggest insurance market, has moved back into profit as a stronger underwriting performance helped it bounce back from last year’s Covid-19 losses, and announced an imminent target for minority ethnic representation across the market.
Lloyd’s made a pre-tax profit of £1.4bn in the first six months of the year compared with a £438m loss a year earlier. It paid out £2.2bn for Covid-19 losses, slightly less than £2.4bn in the first half of last year.
For customers affected by the pandemic, 80% of claims filed have been paid so far. More here:
A separate survey today has found that British employers are facing the most severe shortage of job candidates on record due to the post-lockdown surge in the economy and Brexit.
The Recruitment and Employment Confederation (REC) said employers were increasingly upbeat about the outlook in August, but that their attempts to hire staff were being frustrated by shortages of staff.
This is pushing up starting pay for permanent staff at an unprecedented pace, REC said.
We know the Bank of England is troubled too -- yesterday afternoon, governor Andrew Bailey told MPs that “the concern is getting jobs filled”.
More UK firms struggling to fill vacancies and suffering rising prices
More UK companies are struggling to fill vacancies, and suffering rising prices, as labour shortages and supply chain problems hit the economy.
Around 13% of businesses say vacancies were more difficult to fill in the last month compared with normal expectations for this time of year.
That’s up from 9% in early August, with many firms blaming a lack of suitable candidates, and others (particularly transport firms) pointing to a drop in EU applicants. -- a factor in the UK’s shortage of lorry drivers.
Hospitality was badly hit - with 30% of accommodation and food service activities firms reported vacancies being more difficult to fill than normal.
Across all businesses that reported difficulties filling vacancies, the most difficulties experienced were:
- lack of suitable applicants for the roles on offer (67%) with the professional, scientific and technical activities industry reporting the highest proportion (88%)
- reduced number of EU applicants (25%) with the transport and storage industry reporting the highest proportion (46%)
- increased number of vacancies for other reasons (18%) with the transport and storage industry reporting the highest proportion (47%)
- business cannot offer an attractive pay package to applicants (15%) with the professional, scientific and technical activities industry reporting the highest proportion (25%)
- reduced number of applicants aged 16 to 24 years (12%) with the water supply, sewerage, waste management and remediation activities industry reporting the highest proportion (34%)
- increased number of vacancies because of furloughed workers leaving (4%) with the accommodation and food service activities industry reporting the highest proportion (14%)
That’s according to the latest survey of businesses from the Office for National Statistics, which also showed inflationary pressures building.
Half of construction companies reported that prices of materials, goods or services bought in the last two weeks had increased more than normal price fluctuations.
Across the whole economy, a quarter of firms reported prices rising faster than normal. That’s up from 14% at the end of last year.
Industries with the highest proportion of businesses reporting an increase in prices of materials, goods and services bought in the last two weeks were water supply, sewerage, waste management and remediation activities (65%), construction (50%), and manufacturing (42%).
The report also found that 90% of firms say they are ‘currently trading’, although the transportation and storage sector is lagging behind.
The ONS says:
The transportation and storage industry had the lowest percentage of businesses currently trading in late August 2021, at 78%. The high percentage of paused and permanently ceased traders is partly driven by the freight transport by road industry and the unlicensed carriers industry.
However, within the freight transport by road sub-industry, the proportion of businesses that have paused trading or are permanently ceased trading has declined from 36% in late June 2021 to 29% in late August 2021.
The FTSE 100 index has dropped below the 7,000 point mark for the first time since mid-August.
It’s now down over 1.3% today, as the selloff gathers more pace.
As well as growth fears, a rise in the pound today (up half a cent to $1.381) is weighing on multinationals.
UK furlough total fell to 1.6 million at end of July
The number of UK workers on furlough fell to 1.6m at the end of July, new government figures show.
That’s a decrease of 340,000 jobs from 30 June, where there were 1.9m employments on furlough.
At 31 July 2021, around 25% of employers had staff on furlough, down from 28% at the end of June.
That follows the easing of restrictions in recent months. The furlough scheme also became less generous in July, with employers having to pay 10% of wages for hours not worked (with the government’s share dropping from 80% to 70%).
The report adds:
The arts, entertainment and recreation sector, and accommodation and food services sector had the highest take-up rate of all the sectors, with 15% of employments eligible for furlough on furlough at 31 July 2021. Both sectors have seen large reductions in the number of jobs on furlough during July.
The furlough scheme is due to finish at the end of this month, although business groups and unions have called for it to be extended for companies still suffering from the pandemic.
Since the start of the scheme, a total of 11.6 million jobs have been put on furlough for at least part of the duration of the scheme.
Morrisons boss forecasts 'biblical' Christmas
The boss of Morrisons, the UK’s fourth largest supermarket group, has forecast “biblical” Christmas demand this year as people will be keen to meet-up in bigger numbers, having been thwarted by COVID restrictions last year.
Chief executive David Potts told Reuters:
“Christmas is going to be biblical because I genuinely think that customers want to meet in bigger groups.”
“We’ve got Christmas down as a big Christmas ahead for the industry, for us, for the country.”
Potts also noted that people are already buying “little and often for Christmas.”
He was speaking after the chain reported a drop in profits and predicted the supply chain crisis will push up prices in the shops.
(Hopefully retailers can meet these ‘biblical’ demands -- rather than leaving shoppers struggling to turn water into wine, or sharing out a few loaves and fishes...).
On that point, Potts has said Morrisons has experienced some shortages of water, carbonates, juice, crisps, pet food and wine, but is still keeping products on the shelves:
We have still got an aisle full of water, we’ve still got pop to choose from, it’s just not as wide a range as it was.
Hong Kong stocks slump on China's gaming crackdown
Hong Kong stocks have suffered their biggest one-day fall in six weeks.
The Hang Seng index has closed down 2.3%, the biggest drop since late July, with a sub-index of technology stocks sliding 4.5%.
Tech share were hit by China’s latest crackdown on the gaming industry, with Beijing urging major players to stop focusing on profits and to do more to prevent children becoming addicted to online games.
The South China Morning Post reported that the Chinese government has temporarily suspended approval for all new online games in the country.
UPDATE: Although this has now been changed to say that regulators have slowed the approvals process.
Shares in video game developer Netease slumped 11%, with Tencent falling 8.5%
Chinese regulators have summoned companies to demand they play down profits and further clamp down on how minors can play video games, just days after children in the country were banned from access during the week.
State-run news agency Xinhua reported Wednesday that authorities had called in firms, including industry leaders Tencent and NetEase, to discuss restrictions around the streaming and playing of video games among minors.
During the meeting, companies were “urged to break from the solitary focus of pursuing profit or attracting players and fans,” according to the report.
They were also told to modify any rules or design elements of games that could be seen as “inducing addictions.”
That added to jitters about global growth, after the Federal Reserve’s ‘beige book’ said the US economy has “downshifted slightly”.
Investors are also concerned that the Fed could slow its stimulus programme too early, after James Bullard, president of the St Louis Fed, dismissed concerns this week the labour market recovery was faltering.
TUC' Frances O’Grady: Covid inequalities are chance for unions
A growing backlash against a two-tier Covid-19 labour market offers the possibility for unions to rebuild their strength, according to the head of the TUC, Frances O’Grady.
In an interview before next week’s TUC conference, the trade union umbrella group’s general secretary said there was now a “chasm” between low-paid workers and the better-off.
Low-wage earners had borne the brunt of the pandemic, she said, with little or no option to work from home, no or low sick pay and reduced living standards, while better-off workers have enjoyed greater flexibility with work, financial stability and increased spending power.
“A Covid chasm has opened up between low paid and average paid workers and the better off. It feels like that divide is really sharp.
“Politicians need to start addressing how to close that chasm. That’s important not just for working families but for the economy. We hear a lot about levelling up but if it is not about workers’ rights, their bargaining power and their pay then what is it about?”
Online gambling group 888 has agreed a £2.2bn deal to buy William Hill’s European business and its 1,400 UK betting shops in a move that will see it return to British hands, PA Media explains.
888 will take over William Hill’s international arm from Las Vegas casino operator Caesars Entertainment, which had acquired the gambling giant in April for £2.9bn.
888 said the deal will create a combined group with more than 12,000 employees and annual revenues of $2.5bn (£1.8 billion).
There had been speculation that 888 may look to offload William Hill’s betting shops and keep just the online part of the business, but it said on announcing the deal that it is “excited about the opportunities that the retail business provides”.
Supply shortages and strong demand are driving up some metal prices again today.
Aluminium has hit a new 13-year high, extending its recent rally driven by a clampdown on energy use by China’s producers and the coup in major bauxite producer Guinea.
And nickel is also rallying in London.
Reuters reports that the LME nickel contract has touched its highest since May 2014 at $20,255, buoyed by low inventories and expected demand from the stainless steel and electric vehicle sectors.
Nickel is a key component in lithium-ion batteries - giving them greater energy density, meaning vehicles can travel longer on a single charge.
Last year Tesla’s Elon Musk appealed to producers to “please mine more nickel” to feed electric car batteries.
European markets hit by growth concerns and China risks
European stock markets are all in the red, pulling the Stoxx 600 index away from its recent record highs:
Kyle Rodda of IG says growth concerns and China risks are both biting sentiment.
Price action in equity markets has been particularly bearish today, seemingly as growth fears continue to stifle market sentiment. There’s a few shifting parts in the markets right now, but the big narrative has been the softer growth outlook and the flattening trajectory for the global economic expansion.
It’s all down to Delta, and the data is fleshing that out right now. Though the backward looking numbers are alright, forecasts for US growth, for one, are being progressively downgraded, strategists are at the margins shifting to a more neutral or underweight positioning on equities, and contemporaneous surveys of economic activity, such as the Fed’s Beige Book, are clearly outlining that Delta has all but scuttled the idea that the virus can be extinguished and a historic economic boom can be unleashed.
And on China, Rodda says the crisis at Evergrande is also a concern for investors:
Anxiety was stoked again on reports that Chinese companies, including Tencent, in the gaming industry have been directed to reduce their focus on gaming profits.
As for the latter, news that Evergrande would suspend interest payments on two loans to two banks later this month raised the spectre of a major default by the property developer, raising further questions and concerns that the coming is on the brink of collapse, and a significant risk to China’s notoriously opaque financial system and markets.
FTSE 100 falls to three-week low
Growth worries have pushed the UK’s FTSE 100 index of blue-chip shares to a three-week low in early trading.
The Footsie is down 60 points, or almost 0.9%, at 7034 points, its lowest since 20th August -- with 89 of its 100 members falling.
Energy stocks, financial companies, miners, tech companies and travel firms are all weaker.
British Airways parent company IAG (-3.6%) is the top faller, followed by engineering firm Melrose (-2.7%), and insurance group Prudential (-2.4%).
Morrisons warns of price rises ahead
UK supermarket chain Wm Morrison has predicted there will be “industry-wide” price rises in the coming months, as the food industry faces sustained inflation.
In its interim results, Morrisons flags that the whole British food industry is currently “facing into” the continued challenges of the pandemic and sustained supply chain cost increases, which are largely outside of its control.
We expect some industry-wide retail price inflation during the second half, driven by sustained recent commodity price increases and freight inflation, and the current shortage of HGV drivers.
We will seek to mitigate these and other potential cost increases, such as any incurred to maintain good on-shelf availability.
Morrisons also reported that statutory pre-tax profits fell over 40% in the six months to August 1st, as it was hit by £41m of COVID-19 direct costs, and £80m lost profit in cafés, fuel and its food-to-go offering.
Last week, the UK’s wholesale food industry warned that it cannot protect consumers from price rises forever.
Global food prices have rising sharply to near a decade high, as droughts in the US and frost in Brazil hits crops, according to the UN’s food agency.
EasyJet rejects takeover approach and launches £1.2bn rights issue
Budget airline easyjet has revealed that it has rejected a takeover bid, as it also announces plans to raise £1.2bn from shareholders to help it ride out the pandemic.
EasyJet told the City that it recently received an unsolicited preliminary takeover approach, which was carefully evaluated and then unanimously rejected.
The potential (unnamed) bidder has since confirmed that it is no longer considering an offer for the Company, easyJet says, as it lays out a £1.2bn rights issue.
The indicative proposal took the form of a low premium and highly conditional all-share transaction which, in the Board’s view, fundamentally undervalued the Company.
In deciding to reject it, the Board took into account all relevant factors including the highly conditional nature of the proposal and the certainty and strategic opportunity that the Rights Issue presented to the Company.
Easyjet says that raising £1.2bn of fresh equity will “protect and strengthen” its long-term positioning in the European aviation sector, and help it recover from the pandemic by “resilience from downside risks”.
Shares have dropped by almost 9% in early trading (a rights issue will dilute existing shareholders, unless they take part in the fund-raising).
Computacenter: supply chain issues to last 'well into 2022'
UK IT services provider Computacenter has warned that the supply chain shortages are likely to last until well into next year.
Computacenter reported this morning that ongoing supply shortages in the tech industry has “risen to the top of our challenges”.
Mike Norris, chief executive of Computacenter, cautions that:
While we look forward to the supply chain issues being behind us, we are not expecting this until well into 2022...
Computacenter’s backlog of unfilled orders has hit an eight-month high, as the pandemic-related worldwide shortage of products encourages some customers to place orders early.
But with key electronic components in short supply, product shortages have “materially impacted” the supply of key technologies for our customers, Computacenter says:
In some instances, these shortages have resulted in orders being delayed into the second half of the year, restricting revenues and profitability in the period as a result.
Despite these problems, Computacenter’s revenues grew by 29.2% in the first half of this year, compared to H1 2020, with pre-tax profits swelling 59% to £115.2m.
These chip supply shortage have also hit carmakers, with a swathe of manufacturers suffering production disruption.
While semiconductor factory output was hit by lockdowns, demand for consumer goods jumped in the lockdown. This has also hit mobile phone makers and games console producers, hitting supplies and pushing up costs:
China property market rocked as giant Evergrande struggles to repay $300bn debts
Shares in the embattled Chinese property giant Evergrande have slumped again after two credit downgrades in two days amid concerns that it will default on parts of its massive $300bn debt pile.
Evergrande, which is one of the world’s most indebted companies, has seen its shares tumble 75% this year. They fell by almost 10% on Thursday morning to HK$3.35, which is below the listing price when the company floated on the Hong Kong market in 2009.
Trading in one of the company’s bonds was suspended by the Shenzhen stock exchange on Thursday morning after the price plunged 20%.
The online market trading platform IG said Evergrande posed “a risk of contagion” after Bloomberg reported that Credit Suisse and Citibank were no longer accepting the bonds of another highly indebted Chinese property developer, Fantasia, as collateral.
Introduction: Markets slip as Fed signals US economy “downshifted slightly”
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business
Growth worries are weighing on the markets amid warnings of an economic slowdown on both sides of the Atlantic, as the pandemic continues to disrupt global supply chains.
Anxiety about an economic slowdown has heightened, after the US Federal Reserve warned that the US economy “downshifted slightly” in August, amid rising coronavirus cases and mounting supply chain problems and labor shortages.
In its latest round-up of current US economic conditions, the Fed warned that the renewed surge of the coronavirus has hit dining, travel and tourism, saying:
“The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions.”
The Fed’s ‘Beige Book’ also flagged that businesses are suffering inflationary pressures, and struggling to obtain raw materials and parts, and to hire staff (a familiar tale this year).
“With pervasive resource shortages, input price pressures continued to be widespread.”
Firms also reported:
“substantial escalation in the cost of metals and metal-based products, freight and transportation services, and construction materials,”
This dampened the mood on Wall Street a little, and has knocked Asia-Pacific shares today. European markets are expected to fall too, adding to yesterday’s drop.
Japan’s Nikkei 225 is down 0.7%, while Australia’s S&P/ASX 200 has slumped 1.9%, Hong Kong’s Hang Seng has lost 2% and South Korea’s Kospi 200 is down 1.75%.
Hong Kong’s tech giants led the sharp sell-off after China further tightened its grip on the gaming sector, summoning firms including Tencent and NetEase to ensure they implement new rules for the sector.
And in a sign that the pandemic continues to cause disruption, Japan said on Thursday it will extend emergency COVID-19 restrictions in Tokyo and other regions until the end of this month.
The move is meant to curb infections and prevent hospitals from being overwhelmed, with Tokyo saying it was too early to let down its guard.
The Bank of England also sees signs that the UK’s recovery is slowing, as the supply of goods remains disrupted and firms struggle to fill vacancies.
Governor Andrew Bailey told MPs:
At the moment we’re seeing some levelling off of the recovery, the short term indicators are suggesting that.
The Bank’s governor suggested that Covid disruption to global supply chains, which have upended industries from car making to hospitality, had proved more persistent than expected by Threadneedle Street earlier this year, as higher rates of coronavirus infections and heightened demand for manufactured goods put pressure on shipments.
He said there had been an expectation that consumer demand for goods would increasingly switch to services as pandemic restrictions were relaxed, but that had so far not happened as much as expected.
“There’s this underlying story of imbalanced demand, which we thought would by now have been well on the way to correcting itself,”.
The European Central Bank’s will assess the state of the eurozone economy, as it meets to set monetary policy.
Some ECB policymakers are pushing to ease back on its stimulus programme, after inflation hit a decade high.
Ipek Ozkardeskaya, senior analyst at Swissquote, says:
One of the reasons why the ECB hawks are coming back in charge is the rising inflation. The European CPI hit the 3% mark in August. The latest jump in CPI boosted fears among the inflation-sceptic member states such as Germany, Austria and Netherlands who started calling for tapering of the ECB’s asset purchases sooner rather than later.
The question is when and how? I believe that the divergent opinions at the heart of the ECB won’t let the bank make any sharp move in the close future. We would most probably see the ECB slowing its PEPP purchases, but a reduction in the total size of the pandemic program, a change in regular APP or a rate normalization are highly unlikely.
Today’s meeting will give away some insight about how the ECB will cope with the rising inflation and the stressed hawkish members, what the dovish-hawkish balance will look like and where the euro should be headed next. The chances are we will see President Christine Lagarde soothing the doves’ nerves at today’s press conference – which should trigger some weakness in euro versus the greenback in the short run.
We also get the latest round-up of UK economic indicators from the Office for National Statistics, and weekly jobless figures from the US -- where vacancies hit a new record high yesterday.
- 7am BST: German balance of trade for July
- 9.30am BST: Business insights and impact on the UK economy
- 12.45pm BST: European Central Bank interest rate decision
- 1.30pm BST: European Central Bank press conference
- 1.30pm BST: US weekly jobless report