23 November 2021
The detail’s in the retail
The FTSE 100 struggled over the past week, despite strong retail sales in the UK.
UK retail sales volumes had an uplift of 0.8% in October compared to September. October sales likewise rose by 5.8% compared to the pre-pandemic February 2020 levels. Had it not been for falling vehicle fuel sales, the month-on-month increase would have been even higher. The Office for National Statistics (ONS) highlighted that this did, in fact, represent a normalisation of fuel sales, after they surged in September as fears of a fuel shortage gave way to panic-buying.
Retail sales are generally a sign of a stronger market, yet they also led to some concerns that the Bank of England (BoE) would be encouraged to increase interest rates in the near future.
Adam Hayes, Assistant Editor at Capital Economics, remarked:
“Although some members of the Bank of England’s MPC may be concerned that the rise in inflation will take some momentum out of the economy by reducing real incomes, today’s release may, at the margin, ease those concerns and make them more comfortable with the idea of raising interest rates.”
These fears were aggravated by high inflation figures released on Wednesday. The ONS reported that CPI inflation reached 4.2% in October – up from 3.1% in September – and the fastest rate in almost a decade. Higher fuel costs and energy prices were the main drivers behind the increase; however, the rising cost of second-hand cars and dining out were also noted. The BoE continues to state that high inflation should be transitory, yet Andrew Bailey has professed that inflation could climb as high as 5% before returning closer to the Bank’s 2% target.
European markets fell slightly over the course of the week, as lacklustre market performance on Thursday and Friday eradicated most of the gains in the STOXX Europe 600 made at the beginning of the week – these falls were from a record high.
In other EU news, a new wave of coronavirus is at play, with several countries taking restrictive measures to hinder its spread. Austria announced a lockdown on the Monday, which was then extended to a full lockdown by Friday – for no more than 20 days. The country also declared plans to make COVID-19 vaccinations a legal requirement as of 1 February 2022. The Austrian Traded Index dropped over 2% shortly after the news of the full lockdown on Friday, meaning it closed the week down overall.
Elsewhere, on Monday Royal Dutch Shell announced that it’s set to end its dual-share structure, split between the Netherlands and the UK, and relocate its tax base to the UK. This will see Shell’s corporate structure simplified – something it said would reduce risk for shareholders and allow for a boost in distributions by way of share buybacks. Several commentators also concluded that the Dutch dividend tax is a reason for Shell to move to the UK. Such a move will increase pressure on Dutch politicians keen to retain multinational companies in the Netherlands to contemplate the future of its dividend tax, which would likely be a plus for income investors with Dutch holdings.
American markets had a more successful week compared to their European equivalents. Both the S&P 500 and the Nasdaq grew over the week, in part thanks to the healthy performance of the tech sector.
With the S&P 500 currently sitting at around 4,700, Morgan Stanley forewarned last week that it anticipated it would fall to 4,400 by the end of 2022 – mainly because some of the tech stocks, which have soared in value during the pandemic, struggle to keep a grip on these high share prices. Of note is that a number of other banks, RBC and Goldman Sachs included, expect the S&P 500 to grow next year, albeit at a much slower rate than it has this year.
Emerging markets had a difficult end to the week, with Turkey slashing its interest rates on Wednesday, in spite of rising global inflation. This move saw the price of the Turkish lira go down significantly, and there have since been several reports predicting increasingly higher inflation, not to mention a potential currency crisis unless interest rates increase.
In India, Paytm went through India’s biggest ever IPO; however, its share price then fell by more than a quarter in its first day of trading.