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26 April 2021

Europe Endures a Bumpy Ride

European equities endured a bumpy ride last week. On Tuesday, fears surrounding a third wave of COVID-19 across several European countries were enough to push equities to their worst performing day in 2021, with the STOXX Europe 600 falling -1.78%. Towards the end of the week, however, a strong set of earning reports and an update from the European Central Bank (ECB) turned out to be an uplift for European markets.

As expected, the ECB reiterated monetary policy would remain unchanged until the Eurozone economy reached a sustainable level. The central bank’s President Christine Lagarde stated: “We still have a long way to go for the economy to become sustainable... we have to cross the bridge of the pandemic and be able to walk on solid ground.”. It is, therefore, no surprise that the ECB decided to significantly increase the pace of bond purchases for the second quarter while leaving rates unchanged. At the ECB’s next meeting in June, policymakers will decide on whether to slow down such bond purchases. With the Eurozone’s vaccination programme starting to pick up pace, more conservative members of the committee may opt to reduce bond purchases, but others would argue that the 1.3% GDP growth forecast in Q2 would not suggest a significant rise in inflation over the coming months and, therefore, no need to tighten monetary policy.

The other saviours for the EuroStoxx index last week were several strong earnings reports: Swiss food and drink conglomerate NestlĂ© reported organic sales growth of 7.7% in the first quarter, much higher than the previous year’s 4.3% and the 3.3% analysts had anticipated. An increase in home coffee drinking resulted in a 17.1% jump in sales of Nespresso products and instant coffee, which spurred the solid earnings - NestlĂ©’s share price rose 3% on Thursday as a result. Other well-known European names such as Volvo and French spirits group Pernot Ricard also reported exceptional earnings with their share prices rising +2.60% and +2.45% respectively. The STOXX Europe 600 slightly recovered into Friday, only down -0.84% for the week.

After rallying in reaction to positive economic data, US markets came under selling pressure on Thursday after reports that Joe Biden will propose a new capital gains tax of 39.6% for wealthy American investors earning over US$1m, almost double the current rate. The S&P 500 and Nasdaq slipped -1.09% & -1.42% on the news and were down -1.11% & -1.21% for the week, respectively. If such an aggressive sell off was warranted remains questionable, as introduction of the tax hike has yet to be officially announced, and uncertainty also surrounds the Democrats’ ability to get the proposal passed, as they hold a slim majority over the senate.

The UK’s leading 100 stock index, as measured by CBOE, followed a similar path to that of European Markets. The index began the week with a -2.52% decline to the 682.5 level but has recovered slightly coming into Friday, down -1.70% for the week. The disappointing performance was fuelled by a number of companies, as Britain’s two largest tobacco manufacturers took a significant hit after President Biden considered a cut to nicotine content in cigarettes and a ban on menthols - British American Tobacco dropped 7.5% by the close in London, while Imperial Brands — which own Golden Virginia rolling tobacco and Rizla— fell 6.8%. Primark-owner Associated British Foods also added to the uninspiring performances after reporting a 17% drop in revenue. Although Primark stores welcomed record sales in the first week out of lockdown, the results were not enough to encourage investors and the share price fell 5.5% after publishing.

The Bank of England also announced an exciting development in Leeds this month; the plan to form a new northern hub, including the UK’s first infrastructure bank, was confirmed following the Treasury’s proposal in the budget last month. The Bank said it was too early to say how many staff would eventually work in Leeds, but it intends to have a substantial operation in the city, including senior governors.

The bank has operated in Leeds since 1827, with their previous offices located on the junction of South Parade and Park Row, only a stone’s throw away from the current offices of Redmayne Bentley. John Redmayne was originally a bank clerk before founding Redmayne & Co in 1875 and, despite the firm’s first offices being located in Harrogate, the financial history between the Bank and Leeds City Centre brings us great pride in welcoming a new financial hub to the area. Before its closure in 1997, Redmayne Bentley held an account with the Bank. Redmayne Bentley Chairman and former Lord Mayor of Leeds, Keith Loudon OBE, recalls “I used to write Bank of England cheques out that were twice as large as the ones you and I have”.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Europe Endures a Bumpy Ride
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