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08 February 2021

BoE’s Steps to Increase Spending

After posting its worst weekly performance since October, the FTSE 100 was on its way to making a slight comeback as market sentiment shifted towards positivity last week. The fear weighing on investors’ minds from the short-squeeze saga seems to have died down a little, but it has not completely disappeared. The FTSE 100 was up 2.43% from the previous week’s low of 6,310 and reached a high of 6,588 before Sterling rallied following the Bank of England’s (BoE) rate decision, resulting in a small decline across the FTSE.
 
On the back of the Monetary Policy Committee (MPC) meeting, the decision to keep the main lending rate at 0.1% and a continuation in levels of Quantitative Easing (QE) at £895bn led to a strong Thursday for Sterling, rising 0.94% on the Euro and 0.77% on the Dollar. The MPC – which aims to set monetary policy to keep inflation low and stable, while supporting the government’s economic policy – voted unanimously to leave rates unchanged and maintain target levels of asset purchasing (QE) in line with their inflation goal of 2%.
 
As COVID-19 continues to limit spending and business growth within the UK, the BoE’s monetary decisions will revolve around supporting the economy, the action to keep low interest rates results in cheaper loans for businesses and households which reduces their costs and in theory encourages investment and employment. The steps taken should increase spending and cause inflation to rise, but the current economic outlook is to an extent dampened by the uncertainty of lockdown durations. The bank also downgraded its economic forecast for 2021 to 5%, making a U-turn on its projection of 7.25% in November. Nonetheless, the MPC highlighted that the effective rollout of the UK’s vaccine programme shows promise in leading a rapid recovery for the economy towards the end of year – with over 12 million people receiving at least the first dose – around 18% of the population. The fear of negative interest rates in the short-term was also put to bed, somewhat, with the MPC stating “the Committee was clear that it did not wish to send any signal that it intended to set a negative interest rate in the future” but also acknowledged that “it would be appropriate to start the preparations to provide the capability to do so if necessary.” The MPC did not rule out the decision completely, but the comments came in response to the Prudential Regulation Authority’s recommendation that “implementation of a negative bank rate over a shorter timeframe than six months would attract increased operational risks.”
 
Looking towards global markets, in the US the S&P 500 moved up 4.24% and the Nasdaq 6.38% from the previous week’s close, while the Hang Seng index rose 3.55% in Hong Kong. One of the best performers in the US was Nasdaq-listed PayPal which reported possibly the strongest quarter in its history. The company reported a net income of US$1.57bn, or US$1.32 a share, up from US$43c a share in Q4 2019, more than tripling profits. In addition to the drastic increase in earnings, the total payment volume rose to US$277bn from US$199.4bn, which is likely to be a result of multiple new products being introduced to the platform, such as allowing US users to buy, sell and hold cryptocurrencies. These customers have been logging into their account twice as much as they did previously, the company said. PayPal also predicted revenue to grow at 28% for the first quarter in 2021 as well as an adjusted EPS growth of 50%. With such phenomenal figures the share price has risen 7.3% since reporting. In contrast, one of the less encouraging performers came from the UK last week, Unilever shares are down 6.2% as investors were underwhelmed by the company’s latest earnings report. Underlying operating profit fell 5.8% for the year to $9.4bn with turnover down 2.4% to US$50.7bn, an 1.9% increase in sales and 4% increase in the company’s dividend clearly did not provide enough inspiration for investors.
 
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.
BoE’s Steps to Increase Spending
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