LIVE – Updated at 13:27
Emerging economies could suffer capital outflows and weaker currencies when Federal Reserve tightens US monetary policy, IMF says.
Covid-19 spurred wealthy motorists to buy more Rolls-Royces than ever before because it made them realise life is short, the luxury carmaker has said.
As global cases escalated in 2021, Rolls-Royce Motor Cars, based in Goodwood, West Sussex, booked the highest annual sales in its 117-year history, selling 5,586 vehicles.
The company’s chief executive, Torsten Müller-Ötvös, said the pandemic had led to customers, whose average age was 43, responding to the reminder of their own mortality by splashing out on luxury cars.
“Many people witnessed people in their community dying from Covid and that made them think life can be short and you’d better live now rather than postpone until a later date,” said Müller-Ötvös. That has helped Rolls-Royce.”
He said the carmaker, owned by BMW, had also benefited from the restrictions the pandemic had placed on wealthy consumers’ opportunities to spend their money elsewhere.
“It is very much due to Covid that the entire luxury business is booming worldwide.
People couldn’t travel a lot, they couldn’t invest a lot into luxury services … and there is quite a lot of money accumulated that is spent on luxury goods.”
Take-Two acquiring Zynga in $12.7bn deal
Big takeover news in the games sector: Grand Theft Auto maker Take-Two is acquiring mobile gaming firm Zynga, the creator of FarmVille.
Take-Two has agreed to buy all the outstanding shares of Zynga in a $12.7bn deal, which values Zynga at 64% above its closing price last Friday.
The deal will establish Take-Two as “one of the largest and most diversified mobile game publishers in the industry”, bringing together its portfolio of console and PC games with Zynga’s mobile-based titles.
A statement announcing the deal explains:
Both companies have created and expanded iconic franchises, which will combine to form one of the largest and most diverse portfolios of intellectual properties in the sector.
Take-Two’s labels are home to some of the most beloved series in the world, including Grand Theft Auto®, Red Dead Redemption®, Midnight Club®, NBA 2K®, BioShock®, Borderlands®, Civilization®, Mafia®, and Kerbal Space Program®, while Zynga’s portfolio includes renowned titles, such as CSR Racing™, Empires & Puzzles™, FarmVille™, Golf Rival™, Hair Challenge™, Harry Potter: Puzzles & Spells™, High Heels! ™, Merge Dragons!™, Toon Blast™, Toy Blast™, Words With Friends™, and Zynga Poker™
Take-Two will pay $9.86 per Zynga share – $3.50 in cash and $6.36 in shares of Take-Two common stock, implying an enterprise value of $12.7bn.
Shares in Zynga have surged by over 50% in premarket trading, from $6 to $9.12.
Goldman Sachs analysts have predicted that the Federal Reserve will likely raise US interest rates four times this year, due to steep inflation and the recovery in the jobs market.
They also anticipate the Fed will start its balance sheet runoff process in July, if not earlier as Bloomberg explains:
Rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, Goldman’s Jan Hatzius said in a research note.
“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,” Hatzius said.
“With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.”
MPs push for swift conclusion on Woodford inquiry
MPs have called on the City watchdog to wrap up their investigation into the collapse of fund manager Neil Woodford’s flagship fund swiftly, so any appropriate action can be taken.
The Treasury Committee has urged the Financial Conduct Authority (FCA) to draw its investigation into the failure of the Woodford Equity Income Fund to a conclusion as quickly as possible.
The fund folded in 2019, leaving hundreds of thousands of investors nursing losses.
Treasury committee chair Mel Stride says:
“The collapse of the Woodford Fund led to significant losses for many retail investors.
The FCA’s investigation is set to move into a new phase, and I have today written to the FCA to urge them to allocate the resources required to enable as swift a conclusion to their investigation as possible.”
The committee has also published a letter they received in mid-December by FCA chief executive Nikhil Rathi. Rathi explains that the watchdog was finalising its legal analysis, “with a view to making decisions as to whether to take action and, if so, what action should be taken and against whom.”
In a letter replying to Rathi today, Stride says the Woodford situation remains “a matter of keen interest to the Committee”, and urges the FCA to ensure the inquiry has the resources it needs.
I expect the FCA to ensure that this investigation and any regulatory action which follows is resourced to ensure as swift as possible a conclusion, and that the FCA will take every opportunity (within the confines of the law) to update the Committee as the investigation progresses.
Back in the City, housebuilders are still under pressure as the government laid out plans to make developers help cover the cost of the UK’s cladding crisis.
Persimmon (-4.9%) is still the top FTSE 100 faller, as investors digest the situation, as Newsnight’s Ben Chu tweets:
The Financial Times points out there are few signs that wage increases for European workers are as large as those for their American counterparts, adding:
The recent rebound in the eurozone economy is expected to slow because of restrictions to contain the Omicron variant.
But Jack Allen-Reynolds, senior Europe economist at Capital Economists, said: “If we are right that activity will start to pick up again in February and March, any impact on the pace of hiring should be shortlived.”
Eurozone unemployment near record low
Eurozone unemployment has now almost closed the gap with its best pre-pandemic reading after dropping in November, says Bert Colijn, senior eurozone economist at ING.
This strong performance is thanks to furlough scheme support and rapid demand recovery. The low unemployment rate opens the door further for sustained higher medium-term inflation.
Unemployment continued its rapid decline in November as it fell from 7.3 to 7.2%. Despite restrictions still in place and slowing GDP growth, the labour market continues to boom. All large economies saw declining rates in November, with the most notable drop coming from Spain where unemployment fell from 14.4 to 14.1%. The Netherlands at 2.7 and Germany at 3.2% are among the strongest labour markets in the eurozone at the moment.
Colijn is also hopeful that unemployment won’t spike once job protection schemes wrap up, given demand for workers remains strong.
With furlough schemes still supporting – part of – the job market, there remains some concern about what will happen when this support ends.
We’re not too worried about this anymore as labour demand seems so strong at the moment and take-up of the schemes has already declined dramatically over the course of the pandemic.
Video: Markets: Fed policy, inflation in focus heading into 2022 (Yahoo! Finance)
Eurozone unemployment drops: reaction
Jonas Keck, economist at the CEBR thinktank, says eurozone labour market showed continued improvement in November, with the headline rate of unemployment falling to 7.2%:
Due to an environment of general economic uncertainty, Cebr has recently revised its forecast of eurozone GDP growth downwards. GDP in the eurozone is expected to grow by 4.1% over the course of 2022.
This slowdown in growth and a potential return of stricter public health measures are, however, not expected to lead to a long-term deterioration in the labour market, as most European countries have been successful in shifting the burden of the pandemic from the labour market to public finances.
Despite some near-term headwinds, the general outlook for the eurozone’s labour market is positive.” –
Claus Vistesen, macroeconomist for Pantheon Macroeconomics, predicts that eurozone unemployment will keep falling this year.
Wages, though, don’t appear to be rising sharply in response, points out Oxford Economics’ Oliver Rakau.
But price pressures are building, with eurozone inflation hitting 5% last month, the highest since the euro was created.
The pound has climbed to its strongest level against the euro since the start of the pandemic.
Sterling hit €1.1995 this morning, the highest since February 2020, despite this morning’s encouraging fall in eurozone unemployment.
The pound has rallied in the last month, lifted by optimism that omicron will not derail the economic recovery despite the hit to hospitality in the run-up to Christmas.
It means one euro is worth 83.33p, as this chart from interactive investor’s Victoria Scholar shows.
Eurozone jobless rate improves
Unemployment across the eurozone has fallen again, as the region battles back from the economic shock of the pandemic.
The euro area jobless rate fell to 7.2% in November, data firm Eurostat reports, down from 7.3% in October and close to its pre-pandemic levels.
A year earlier, it was 8.1%, before vaccine rollouts helped the European economy to reopen.
During November, the number of people unemployed fell by 222,000 in the eurozone, and by 247 000 in the wider European Union and by 222 000 in the euro area.
But that still leaves 11.8m unemployed people in the eurozone, and nearly 14m in the EU.
The spread of Omicron, and the introduction of lockdown measures in some European countries late last month, may have slowed the jobs recovery.
In the City, shares in UK housebuilders have dropped after the government ordered the industry to pay £4bn to help remove dangerous cladding from buildings.
In a letter to property developers this morning, secretary of state for levelling up, housing and communities Michael Gove said they must help foot the bill, following the Grenfell Tower disaster in 2017.
“It is neither fair nor decent that innocent leaseholders, many of whom have worked hard and made sacrifices to get a foot on the housing ladder, should be landed with bills they cannot afford to fix problems they did not cause,”
Gove is unveiling the £4bn package today to help leaseholders escape the onerous costs involved in replacing combustible cladding. Those who live in blocks between 11m and 18m tall will no longer face crippling bills, which had run into tens of thousands of pounds.
Speaking on the BBC Today programme (after being freed from the Broadcasting House lift), Gove explains that the big housebuilders have all been making significant profits, so need to make a fair contribution to the cost of replacing Grenfell-style cladding.
Housebuilders are leading the FTSE 100 fallers, with Persimmon (-3.6%), Barratt Development (-3.2%), Taylor Wimpey (-3%) Berkeley Group (-2.8%) all weaker.
The government expects that all developers responsible for affected buildings with annual profits from housebuilding of at least £10m will be in the frame for paying up under the new plan.
Gove is giving developers until March to come up with a fully funded plan for resolving the cladding crisis. Otherwise, ministers could restrict access to government funds and future procurement if they fail to act, or legislate to force them to pay up.
Housebuilders had already set aside funds for cladding issues, and already face a levy on profits to address the problem. The industry argues that other organisations are also involved in the construction of affected buildings, including housing associations, local authorities, and the manufacturers who produced materials that weren’t fit for purpose.
Campaigners have warned that leaseholders face other serious fire-safety problems, and massive costs to fix. That includes defective fire doors, flammable balconies and missing firebreaks because of non-compliant building works. Here’s the full story.
Brexit changes will add to soaring costs in 2022, warn UK manufacturers
Manufacturers have warned that Brexit will add to soaring costs facing British industry, amid concerns that customs delays and red tape will rank among the biggest challenges for firms this year.
Make UK, the industry body representing 20,000 manufacturing firms of all sizes from across the country, said that while optimism among its members had grown, it was being undermined by the after-effects of the UK’s departure from the EU.
One year on from the end of the transition period, two-thirds of industrial company leaders in its survey of 228 firms said Brexit had moderately or significantly hampered their business.
More than half of firms warned they were likely to suffer further damage this year from customs delays due to import checks and changes to product labelling.
According to the 2022 MakeUK/PwC senior executive survey, Brexit disruption remains among the biggest concerns facing industry bosses for the year ahead as Britain’s departure from the EU complicates the fallout from Covid-19 and the rising costs facing companies.
Delays at customs, the additional costs from meeting separate regulatory regimes in the UK and the EU, and reduced access to migrant workers were among top concerns raised in the survey.
The report says:
“It is clear from these figures that Brexit and the global Covid-19 pandemic have had a scarring effect on the mentality of many businesses, which are traumatised by the ongoing delays and disruptions to their supply chains.”
Shares in travel and hospitality firms have risen this morning, on hopes that the pandemic may be easing.
British Airways parent company IAG (+2.4%), conference organiser Informa (+1.4%), budget airline easyJet (+3.7%) and Wizz Air (+2.9%), cinema operator Cineworld (+6.5%) are among the risers in London.
This follows signs that omicron is less severe than the Delta variant of Covid-19, following record numbers of cases in the UK in recent weeks.
Luca Paolini, chief strategist at Pictet Asset Management the economic recovery remains resilient despite the restrictions introduced to combat Omicron.
The global recovery remains resilient, thanks to a strong labour market, pent-up demand for services and healthy corporate balance sheets.”
Given our positive outlook for the economy, we are looking for opportunities to raise our weighting in stocks in 2022.”
The global economy is on track to grow 4.8 per cent in 2022 with the US experiencing a strong recovery in both manufacturing and services.”
That could mean US interest rates rise this year, potentially creating turbulence in emerging economies and some volatility in the financial markets.
Price pressures are more persistent than expected, however. Inflation is still running way above the central bank’s official target. We expect core inflation to peak in early 2022, which should prompt the US Federal Reserve to raise interest rates by as early as June 2022.”
Here’s AJ Bell investment director Russ Mould on this morning’s early market action.
“Despite some tentative positivity in Asian trading, the UK index was not helped by a weak start for the housebuilding sector.
“The UK Government is reportedly looking for property developers to take on a greater share of the costs of repairing dangerous apartment blocks in the wake of the Grenfell tragedy in 2017.
“Many flat owners have been left with onerous costs for replacing flammable cladding and the latest reports on who will foot the bill should come as no surprise to the sector in that context.
“The housebuilders have benefited from generous incentives, such as Help to Buy and the mortgage guarantee scheme, in recent years. However, state support is not a one-way street and the sector needs to do its bit to look after its customers.
“With a quiet start to the week for big corporate and economic announcements, markets could remain in a holding pattern until Wednesday when US inflation figures will reveal just how acute inflationary pressures are in the world’s largest economy.”
Aldi reports ‘best ever’ Christmas amid strong demand for beer, wine and spirits
German discount supermarket chain Aldi has announced its “best ever” Christmas, and predicted it would prosper as households tighten their belts.
My colleague Rob Davies explains:
Sales at Aldi were up 0.4% in December 2021 compared with the equivalent month in 2020, despite a boost that year from people ordering more groceries amid a lockdown that forced hospitality venues to close.
Kicking off the Christmas updates for supermarkets, Aldi claimed figures from the research firm Kantar showed it was the “only major supermarket” to increase its sales in December.
Its sales growth over the month was partly driven by record sales of its premium range and strong demand for beer, wine and spirits.
Its chief executive said the discounter stood to benefit even further if people opted for cheaper shopping lists this year, as a cost-of-living crisis looms due to soaring energy bills and higher taxes.
Another important housing story…Britain faces a crisis in the wake of the pandemic as confusion about planning rules and shortages of staff undermine government targets to build 300,000 homes a year.
A retreat from housebuilding by smaller companies must be tackled by ministers to reduce the shortage of homes, according to a House of Lords committee.
A report, titled Meeting Housing Demand, warned:
“Too many people currently live in expensive, unsuitable and poor-quality homes, and housing supply needs to be increased now to tackle the housing crisis.
Introduction: IMF says emerging economies must prepare for Fed policy tightening
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Turbulence could be approaching as the US central bank prepares to wind back its massive stimulus programme, and emerging economies would be in the front line.
The International Monetary Fund has warned this morning that emerging markets could suffer painful spillovers once the US Federal Reserve starts to tighten monetary policy. With US inflation hitting near 40-year highs, US interest rates could rise soon.
Those spillovers could include capital surging out of emerging markets, dragging down their currencies. That would be particularly serious for countries with large debts or high inflation.
The IMF explains in a new blogpost this morning:
Broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally.
These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.
The Fed is on track to end its asset-purchase programme in March, and expects to raise interest rates three times this year.
The minutes of its December meeting show that it could start to cut its balance sheet, known as quantitative tightening (QT), soon too — news that rattled the markets last week.
Such tightening could have more severe implications for vulnerable countries, the IMF adds:
In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the US dollar.
The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies.
So, with the Fed sounding hawkish, and omicron hitting supply chains and pushing up costs, emerging market policymakers need to prepare for a storm.
Several emerging economies, such as Brazil, Russia, and South Africa, raised their interest rates in 2021, due to high inflation.
But more action may be needed. Those with high debts denominated in foreign currencies should look to reduce, or hedge, that exposure, while those with high debts may need to cut spending or lift taxes faster, the IMF says.
Such ‘fiscal tightening’ would weigh on growth and employment, of course, which highlights the dilemma facing emerging market politicians and central bankers.
Worryingly, the IMF also warns that there could be bank failures in some weaker countries, saying:
For countries where corporate debt and bad loans were high even before the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution regimes should be readied.
The ongoing Covid-19 pandemic also threatens emerging markets — many of whom have not benefitted from the mass vaccination rollouts seen in advanced economies.
The IMF concludes:
While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic.
Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for potential bouts of economic turbulence.
- 10am GMT: Eurozone unemployment figures for November
- 3pm GMT: US wholesale inventories for November
European stock markets have started the week in the red.
The FTSE 100 index has dipped by 10 points, or 0.12%, while Germany’s DAX and France’s CAC are both 0.5% lower.
“Choppiness continues this week with European markets initially opening in the green before shifting into the red. Oil & gas is outperforming while household goods are under pressure. There’s no shortage of risk events for the week ahead including US inflation data, earnings from the US financial giants and comments from Fed Chair Jay Powell.
After opening flat, the FTSE 100 is giving back almost 0.5% with the next major support level at 7,450. The DAX and the CAC have swung from gains to losses this morning with a nervous overhang after last week’s volatility capping any notable gains.”
The prospect of America raising interest rates, and unwinding its bond purchase stimulus programme, is weighing on global markets – so the IMF’s blogpost is well-timed.
Shares, and other riskier assets such as bitcoin, fell last week, as investors anticipated that the Federal Reserve could unwind its balance sheet sooner and faster than expected.
Sovereign bond prices have also fallen, driving up the interest rates on government debt, as traders anticipate the Fed lifting rates and reducing its holdings of US Treasuries during 2022.
Jim Reid of Deutsche Bank says it’s been a dramatic start to the year:
To be fair the Fed were starting to catch up with reality late last year but Omicron meant that the market was reluctant to read their more hawkish move as entirely realistic given the risks that the variant presented.
However the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas whilst at the same time the Fed have become even more hawkish by upping the ante on QT. So a perfect storm.
Source: Thanks msn.com