- FTSE 100 dips 15 points
- OBR releases July fiscal risks report
- The OBR says “once in a century” financial cataclysms are now occurring every decade
The Office for Budget Responsibility (OBR) has released its fiscal risks report for July, timed nicely ahead of the UK government’s big announcement on future lockdown policy.
The OBR’s report covers the economic and fiscal impact of the coronavirus pandemic over the past year and its potential medium- and long-term legacy for the public finances; the risks to the public finances presented by climate change including a range of scenarios illustrating the fiscal impact of different ways to get to net-zero by 2050; and the risks posed by changes in the cost of debt and the sensitivity of the public finances to global interest rates, inflation and an extreme case of a loss of investor confidence.
Danni Hewson, an analyst at AJ Bell, has read the report so you (and I) don’t have to, and she asks the rhetorical and metaphorical question, can the chancellor of the exchequer, Rish Sunak, walk and chew gum at the same time?
“According to the boss of the government spending watchdog that’s what’s going to be required if the chancellor is going to pull the country out of the pandemic in a fit and proper state to deal with what comes next. Because what comes next, says Richard Hughes [of the OBR], could be another catastrophic shock, whether that’s from climate change, disease or even cyber-attacks the country, indeed the world, is vulnerable to,” Hewson said.
“There is no one solution, the government can’t just focus on spending the country’s way out the pandemic at the expense of failing to spend on climate change measures. Similarly it can’t ignore Covid scars and fail to fund catch up programmes for education or extra cash to help the NHS whittle down ballooning waiting lists in order to pay down debt and create headroom to deal with the next big global challenge. It has to do it all and it has to do it all fairly quickly if it’s not going to cost more in the long run.
“The road to net zero is paved with fiscal opportunities and more than a few potholes. Crack on and costs can be spread over the next thirty years, decades of carbon taxes can offset spending and any loss of fuel duty could be replaced by a road user charge. Act quickly and the cost of meeting targets could add less to the debt ledger than the pandemic has done,” Hewson said.
“Food for thought when you consider the OBR warns that the debt mountain, which has been shovelled up higher because of pandemic costs, is more exposed to inflation and rate shocks and those shocks are becoming more frequent but the ability of the country to deal with shocks is becoming more resilient. It took four years for the economy to return to pre-crisis output levels after 2008, current estimates suggest recovery from the pandemic will take just two,” she noted.
“But growth is slowing and there is a danger in the UK that recovery will deepen the chasm between the haves and the have nots. Whilst savings have increased for a great number of people the OBR tilts a mirror towards those whose household finances have spiralled the other way.
“Yes, the chancellor has a tightrope to walk, whilst chewing the aforementioned gum,” she concluded.
So, now you know.
Meanwhile, the FTSE 100 was stoically sticking to its brief of boring the pants off us all by dawdling 15 points (0.2%) in arrears at 7,150.
12.35pm: US stocks to open mostly lower
US shares are set to open mostly lower after the long weekend break.
Spread betting quotes suggest the Dow Jones industrial average will open 41 points lower at 34,745 and the S&P 500 4 points easier at 4,352.
The tech-heavy Nasdaq 100, however, is expected to eke out a five-point rise at 14,733.
Oil stocks are likely to be in focus after the OPEC+ talks ended in disarray yesterday.
“Official OPEC+ negotiations have broken down but back-channel discussions continue. The negotiations have been very difficult because the UAE is touching upon the very nerve of the core strategy of OPEC+: to keep investments in check,” said SEB’s chief commodities analyst, Bjarne Schieldrop.
“The UAE is planning to spend USD 25 bn to 2030 and lift its production/capacity by 56% from 3.2 m bl/d to 5 m bl/d. All of OPEC+ obviously cannot do the same. At the same time, the UAE cannot both have a lot more market share and still stay within a capex disciplined OPEC+,” he noted.
“The best solution right now would be to decide to lift production by 0.4 m bl/d in August and then continue with the current difficult discussion about an extension of the current deal to December 2022 and what baselines to use. If production caps stays unchanged for August, it is likely that production will increase by 0.4 m bl/d anyhow and the group would look irresponsible and get a lot of political heat from both China and the US on top,” the Nordic investment bank’s commodities analyst added.
The ISM services reading for June is the key US economic release today, although Daiwa Capital Markets observed it will probably carry less weight than usual with the June employment report already released last week.
“Daiwa America’s Mike Moran expects the headline index to remain close to last month’s record reading of 64, while Markit’s less-followed services PMI should print in the same ballpark based on last month’s flash reading,” the Japanese broker said.
In London, the FTSE 100 was down 13 points (0.2%) at 7,152.
11.20am: Oil giants little moved by collapse of OPEC+ talks yesterday
Oil prices have been on a roll since OPEC+ ministers called off their latest conflab yesterday without reaching an agreement.
The price of Brent crude for September delivery has risen 13 cents to US$77.29 a barrel, having been some 50 cents higher earlier this morning.
“After days of tense discussions and plenty of infighting between Saudi Arabia and the United Arab Emirates, the group failed to agree to ease output curbs, instead abandoning the meeting,” explained Sophie Griffits at OANDA.
“The immediate consequence of the breakdown in talks is that the oil supply increase the market was expecting won’t be happening. The additional 500,000 to one million barrels a day increase in production expected won’t be materialising for now. Given the oil market is so tight, prices are unsurprisingly on the rise.
“According to OPEC, the demand outlook remains strong as economies reopen, with demand expected to pick up by around five million barrels a day in the second half of the year. Inventories have been draining for the past six weeks. Given the strong demand and limited supply, this is unlikely to change, highlighting the need for additional supply,” she added.
BP PLC (LON:BP.) is barely changed, however, while Royal Dutch Shell PLC (LON:RDSB) edged up 0.4% to 1,456.6p but that was not enough to stop the FTSE 100 index from sliding 10 points (0.1%) to 7,155.
10.55am: Torpid show
Yesterday’s lack of action was partly ascribed to US markets being on holiday but there is no such excuse today for London’s torpid showing.
The FTSE 100 was virtually unchanged – down 3 points (0.0%) at 7,162, with the release of UK Construction PMI this morning doing little to galvanise the market, despite some eye-catching numbers.
“June’s construction PMI pointed to a sector emerging from the pandemic in fine fettle. The index rose to 66.3, the highest since June 1997. Growth in June was broad-based across all major construction sub-sectors, aided by the reopening of the economy,” observed Martin Beck, the senior economic advisor to the EY ITEM Club.
“Even allowing for the tendency of the PMIs to overplay changes in activity at times of big shifts in sentiment, the economy looks to have shrugged off the delay to lifting remaining COVID-19 restrictions,” Beck said.
The UK services #PMI posted at 62.4 in June, pointing to a solid expansion in business activity. Job creation rose at the fastest pace in 7-years while strong demand persisted. Input and output price inflation hit record highs, however. Read more: https://t.co/vCgFFG6kGI pic.twitter.com/l2rBRF40pu
— IHS Markit PMI(TM) (@IHSMarkitPMI) July 5, 2021
“The outlook for the construction sector is promising, suggesting that the PMI will remain elevated for some time to come. Confirmation that almost all remaining domestic COVID-19 restrictions, including social distancing on construction sites, will end on 19 July should make life easier for the sector. Continued buoyancy in the housing market should support new home building, while maintenance and repair activity will gain from a rise in demand for home improvements and the need to retrofit buildings to meet the Government’s net-zero ambitions. And the step-change in levels of public sector investment announced over the last year, including spending on infrastructure projects like HS2, will further boost activity.
“On the other hand, prospects for the commercial property sector remain clouded by the uncertainty over changes in working practices prompted by lockdowns. There is also growing evidence of a construction labour shortage, which may have been deepened by some EU workers returning home due to the pandemic. Meanwhile, supply chain disruption is exacerbating cost pressures. But overall, the construction sector looks better placed for sustained growth than at any time for more than a decade,” Beck added.
Talking of the commercial property sector, British Land Company PLC (LON:BLND) and Land Securities PLC (LON:LAND) were the two worst-performing blue-chip stocks; the former was down 2.9% at 507.2p and the latter was off 2.1% at 690p.
9.45am: Construction activity surges despite raw materials shortages
Construction output growth hit a 24-year high in June, according to the IHS Markit/CIPS.
The IHS Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) Total Activity reading for June was 66.3 in June, up from 64.2 in May.
Sharp increases in business activity were seen across all three main areas of the construction sector monitored by the survey.
The housebuilding sub-category index rose to 68.2 and grew at its fastest pace since November 2003, while the commercial work index jumped to 66.9, clocking up its strongest showing since March 1998.
The civil engineering activity index rose to 60.7 but the speed of growth eased to a three-month low.
(A reading above 50 on a PMI indicates an expansion in activity).
“June data signalled another rapid increase in UK construction output as housing, commercial and civil engineering activity all expanded at a brisk pace. The headline index signalled the fastest rise in business activity across the construction sector for 24 years. Total new orders expanded at one of the strongest rates since the summer of 2007, mostly reflecting robust demand for residential projects and a boost to commercial work from the reopening UK economy,” said Tim Moore, the economics director at IHS Markit, which conducts the survey.
A wave of new orders overwhelmed supply chains again this month, according to Duncan Brock, the group director at the Chartered Institute of Procurement & Supply (CIPS). Stock levels struggled to keep up as building work accelerated at the fastest rate since June 1997, he added.
“The meagre availability of raw materials placed obstacles in the path of stronger workflows where supplier delivery times extended into record-breaking territory once again and surpassed the height of disruption when the pandemic first hit.
“A lack of delivery drivers and logistics difficulties for EU imports left stock undelivered or unavailable and construction companies waited while costs mounted.
“Construction’s heavy load remains inflation rising to its highest rate since April 1997 as a staggering 86% of respondents reported paying more for their goods in June.
“These malfunctions in supply chain performance may be a global issue but this doesn’t help UK builders who are ready but unable to return fully to projects which was reflected in the lowest optimism since January. This surge in activity will lose momentum while labour availability along with key materials remain elusive,” Brock said.
The FTSE 100 was down 8 points (0.1%) at 7,157.
8.40am: Traders ignore volatility in Asia
The FTSE 100 opened a smidge higher as traders ignored the volatility earlier in Asia, which was driven by concerns over the Chinese tech sector.
The blue-chip index appears to have largely decoupled from the wider world as its mix of multi-national financials, re-domiciled overseas businesses and ex-growth companies continued to prove resistible to the wider world.
The FTSE 250 index of largely UK-based firms retreated from record territory amid a bout of mild profit-taking.
A mix of re-opening jitters and worries over the Covid third wave dogged sentiment early on, while broader macro-economic themes such as inflation continued to play on in the background.
It was a rare airborne start for international carrier IAG (LON:IAG), which led the blue-chip index with a 1.5% gain.
Online grocer-turned-technology giant Ocado (LON:OCDO) was 1% higher after its interim figures, which appeared to pass muster.
“[It] is seeing a twin benefit from the move to online grocery shopping, with a near term boost to retail revenues accompanied by underlining future demand for its smart technology solution,” said Richard Hunter, head of markets at Interactive Investor.
6.50 am: FTSE 100 called lower
The FTSE 100 is heading for an early fall even as Wall Street traders return after their extended 4th of July weekend break.
London’s blue-chip stocks have been called 12 points lower by spread-betters on the IG platform, a day after starting the week with a near 42-point gain to 7,164.91.
The Footsie remains around 600 points off its all-time highs from a few years ago, while its smaller sibling, the FTSE 250 notched up another record yesterday with a 275-point gain to ascent past the 23,000 mark.
Pressure on the blue chips is perhaps expected to come from a rallying pound this morning, up 0.25% to 1.3887 against the dollar and chipping away at overseas takings for the global multinationals that dominate the UK’s outward-looking benchmark.
A bullish note lands in the inbox this morning from Berenberg’s economics team, wondering if we could be emerging from the spectre of the coronavirus pandemic into the ‘golden twenties’.
“Although the new ‘Delta’ wave of infections is casting a dark shadow over some sectors such as tourism, leading indicators for the advanced world project solid growth for H2 2021 and beyond. Step by step, economies are decoupling from medical trends. The pandemic is turning endemic,” says chief economist Holger Schmieding.
“The rapid bounce-back from the pandemic could set the stage for a prolonged period of strong gains in productivity and per-capita GDP. Unless policymakers get it wrong, the advanced world and many emerging markets could be heading for the ‘Golden Twenties’.
“Initially, unprecedented monetary and fiscal policy support and excess savings by households can power the upswing well beyond the return to pre-pandemic levels of activity from the demand side. Over time, ongoing gains in supply due to a faster diffusion of frontier technologies and more business investment in response to labour shortages can raise trend growth.”
He notes four serious risks, however: new variants of the virus could render current vaccines ineffective and interrupt the recovery until medical science has caught up again; a stronger and more persistent surge in inflation that could force central banks to step on the brakes; an attack by China on Taiwan; misguided economic policies with excessive tax hikes and regulatory burdens could damage the supply potential of economies.
Around the markets
- Pound – up 0.25% to US$1.3887
- Oil – Brent crude up 0.5% to US$77.53 per barrel
- Gold – up 0.65% to US$1,803.0 per oz
- Bitcoin – up 1.4% (over 24 hrs) to US$34,758.69
6.50am: Early Markets – Asia / Australia
Stocks in the Asia-Pacific region were mostly lower on Tuesday as the Reserve Bank of Australia (RBA) kept the official cash rate unchanged at 0.1% and said it will continue bond purchases at a slightly reduced rate.
RBA governor Philip Lowe said that the economic recovery in Australia is stronger than earlier expected and is forecast to continue.
However, Lowe highlighted the RBA’s growing concern about the lift in house prices across the nation’s capital cities.
The Shanghai Composite in China dipped 0.54% and Hong Kong’s Hang Seng index slipped 0.43%
In Japan, the Nikkei 225 gained 0.27% while South Korea’s Kospi rose 0.28%.
Shares in Australia declined, with the S&P/ASX 200 trading 0.63% lower.