The challenge in writing a weekly note is that most subjects don’t start and finish in a seven-day period; economies and markets are fluid and continuous, with events taking weeks, months or even years to play out. Over the last couple of weeks, we have written about inflation and its effect on bond markets, of rising gas prices and of a lack of direction in equity markets and these subjects are still as relevant this week. For good measure, we can now also add to the mix a Facebook blackout and US debt ceiling concerns to the headlines.
New Chief Economist for the Bank of England (BoE), Huw Pill, warned this week that inflation in the UK may be higher and last longer than originally anticipated, in part driven by rising energy prices and a continued global supply shortage. Earlier in the year investors assigned around a 10% probability to UK interest rates rising by March 2022, this week the probability had risen to around 90%. The likelihood of two interest rate hikes by May 2022 has moved from less than 10% just four months ago to around 80% today. Whether we are witnessing a structural shift to sustained higher interest rates and inflation, or whether this will be a short-term hiking cycle (more akin to 2018) is unclear currently. As investors, we need to think carefully about portfolio construction and the mix of assets we would want to hold if the 30+ year bull market in bonds is finally over.
Facebook has evolved into so much more than just a social-media company and while a few hours break from Facebook, Whatsapp and Instagram may have been welcome by many, it was a source of lost revenue not only for the company, but for many businesses who use their platform for sales and marketing. It is estimated that it cost the technology giant around $100m in lost revenue as well as wiping off nearly $50bn of equity value at one point. The outage interrupted business, Government communications and, in some developing countries blocked access to the wider internet. It was interesting to read that due to the firm’s work from home policy many remote engineers were not able to communicate with the staff in the data centres and caused the crisis to drag on longer than it should. Some reports suggested that the outage even locked staff out of buildings and data rooms as the system linking door security to work permits failed. The domino effect both locally and globally should be a wake-up call.
On Friday we woke to the news that the US Senate voted in favour of extending the debt ceiling, allowing the nation to meet its liabilities and continue to borrow. Janet Yellen was vocal in the run-up to the vote, stressing that if the debt ceiling was not extended it would have severe implications for the US economy.
US non-farm payroll jobs data was released on Friday afternoon. The data showed 194,000 jobs had been added to the economy in September, below estimates of 500,000. Unemployment in the US fell to 4.8% and with a considerable amount of job openings coupled with elevated consumer demand we can expect unemployment to fall further over the remainder of 2021.
Further East (or West depending on which direction you are travelling and from where) China and Russia both appear to continue to be influencing a rise in gas prices. Russia is rumoured to be restricting gas supplies as part of a strategy to encourage EU countries to approve Nord Stream 2; their new Baltic Sea pipeline. Gazprom, Russia’s gas export monopoly supplies a staggering 35% of European gas needs. It’s alarming how reliant Europe has become on one nation (Russia) for its gas needs. In January, China recorded its lowest temperatures since the 1960s leading to widespread power cuts. To avoid it happening again this winter, the Xi government has ordered its state-owned energy firms to secure gas supplies for this winter “at all costs” which is fuelling the energy price crisis across the globe.
This week’s news and recent events highlight the increasing reliance we have on the Superpowers of China, Russia and the US as well as the superpowers of the technology giants; something we need to keep a watchful eye on as individuals, business owners and investment managers.
Andy Triggs | Head of Investments, Raymond James, Barbican
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.