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12 July 2021

Economic Slowdown Fears Replace Inflation Concerns

Global equity markets retreated from recent highs as the narrative flipped from runaway inflation to concerns over economic slowdowns. With China one of the first countries returning to normality, investors appear to be searching for some inclination as to how the rest of the world will fare once economies have reopened, and the news flow from China is now centre stage.

Last Wednesday, the State Council – China’s equivalent to the UK Government’s cabinet – stated the People’s Bank of China could aim to stimulate the economy by cutting the amount required for banks to hold in their reserves, otherwise known as the reserve ratio requirement. After the tapering stance taken by the central bank over recent months, it could be argued that the change in tone is signalling the potential for Chinese second-quarter GDP data to come in short of expectations. If this comes to fruition, the developing situation in China may tell the tale for other central banks in the coming months. Considering the increased threat of the COVID-19 Delta variant hindering recoveries across the world, central banks could remain accommodative with rate hikes delayed further than the market currently thinks.

The move in Treasury bonds last week also hinted at weaker growth and inflation than was initially perceived. The ten-year US Treasury yield fell as low as 1.25%, the lowest point in five months and a drastic reversal from its rise above 1.7% back in March. In Europe, German government bonds rallied as well. The ten-year yield dropped 0.03% to -0.323%, hitting its lowest point since March.

Although the move in bonds highlighted that the market is leaning towards transitory inflation and slower economic growth, there may be other factors driving a flock to government bonds outside of this. The activity in China over recent past weeks has shown an autocratic stamp from the governing Chinese Communist Party (CCP). Most recently, DiDi Global, the Chinese ride-sharing company with more users than Uber, listed its shares on the New York Stock Exchange. Just a week later, the Chinese regulator stated that DiDi had collected users’ data illegally, in a bid to protect personal data and national security. This month, regulators also blocked the Tencent-backed merger of Huya and Douyu, two of the country’s biggest video game streaming sites. Another headline story saw Ant Group have restrictions placed on it for monopolistic containment, with its listing also banned back in November. These are all part of a broader policy move to crack down on Chinese tech giants becoming a threat to the Government. It is possible that this aggressive stance by the CCP could be repeated on the global stage and, therefore, investors are seeking safer assets such as government bonds in anticipation of geopolitical tensions escalating further.

Overall market sentiment last week weakened as a result of several factors, but both the main US indices and the UK’s leading index remain close to their highs, pulling back to the previous weeks’ levels. The US S&P 500 and Nasdaq fell 0.91% and 0.57% respectively, while the UK’s leading index dropped 1.88%.

Leeds-based airline and holiday group Jet2 reported a pre-tax loss of £373.8m for the year ending in March. The airline industry has been one of the hardest hit by the pandemic, with Jet-2’s fleet grounded for more than half the financial year. Jet2 previously reported record results for the year ending March 2020, and the share price rose to almost 2000p before briefly free-falling 90% to 180p during the March crash. As the UK Government lifts its restrictions on travel, including last week’s announcement that passengers who are double vaccinated can now to travel to amber list destinations without having to quarantine on return, a clearer flightpath may be on the horizon for Jet2.

Morrisons is also close to completing a £9.5bn takeover by SoftBank-owned private equity firm Fortress. The UK Business Secretary Kwasi Kwarteng is supposedly requesting a meeting with the firm for reassurance on job security and its ability to adhere to the responsibilities of managing one of the UK’s largest and most historic supermarkets. The takeover bid did, however, include a list of commitments ensuring employees, suppliers and pension holders are safeguarded. The bid offered 252p a share and a 2p special dividend.

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.
Economic Slowdown Fears Replace Inflation Concerns
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