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WeekWatch -‘Despite strong retail sales in the UK, the FTSE 100 struggled over the last week’ Nov 21

WeekWatch -‘Despite strong retail sales in the UK, the FTSE 100 struggled over the last week’ Nov 21

Despite strong retail sales in the UK, the FTSE 100 struggled over the last week.

Retail sales volumes rose by 0.8% in October in the UK compared to September. October sales were also up 5.8% compared to the pre-pandemic February 2020 levels. The month-on-month increase would have been even higher, if it wasn’t for falling vehicle fuel sales. The Office for National Statistics (ONS) pointed out that this represented a normalisation of fuel sales, after they spiked in September as fears of a fuel shortage resulted in panic buying.

While retail sales increasing is typically a sign of a stronger market, it also led to some concerns that it would encourage the Bank of England (BoE) to increase interest rates sooner rather than later. Adam Hayes, Assistant Editor at Capital Economics noted: “Although some members of the Bank of England’s MPC may be concerned that the rise in inflation will take some momentum out of the economy by reducing real incomes, today’s release may, at the margin, ease those concerns and make them more comfortable with the idea of raising interest rates.”

These fears were compounded by high inflation figures released on Wednesday. According to the ONS, CPI inflation hit 4.2% in October, up from 3.1% in September, and the fastest rate in almost ten years. Higher fuel costs and energy prices were the main reasons behind the rise; however, the increasing cost of second-hand cars and eating out were also mentioned. The BoE is maintaining that the high inflation should be transitory; however, Andrew Bailey has admitted inflation could climb as high as 5% before it returns closer to the Bank’s 2% target. European markets fell slightly over the week, as poor market performance on Thursday and Friday wiped out most of the gains in the STOXX Europe 600 made at the start of the week. These falls were from a record high.

The EU is currently facing a new wave of COVID-19, and several countries are taking restrictive measures to slow its spread. Among the most extreme, Austria announced a lockdown on the Monday, which it then extended to a full lockdown by Friday, for a maximum of 20 days. It also announced plans to make COVID-19 vaccinations a legal requirement from 1 February 2022. The Austrian Traded Index fell over 2% in the hours following the news of the full lockdown on Friday, ending the week down overall.

Elsewhere, Royal Dutch Shell announced on Monday that it planned to end its dual-share structure, split between the Netherlands and the UK, and relocate its tax base to the UK. Such a move will see Shell’s corporate structure simplified, something it said would reduce risk for shareholders, while allowing for an acceleration in distributions by way of share buybacks. Several commentators also pointed to the Dutch dividend tax as a reason for Shell to move to the UK. The move will increase pressure on Dutch politicians keen to keep multinational companies in the Netherlands to consider the future of its dividend tax, which would be positive for income investors with Dutch holdings.

American markets fared better than their European counterparts, with both the S&P 500 and the Nasdaq growing over the week, partly thanks to the strong performance of the tech sector.

With the S&P 500 currently sitting at just over 4,700 at the time of writing, Morgan Stanley warned last week that it expected it to fall to 4,400 by the end of 2022; primarily as some of the tech stocks, which have exploded in value during COVID, struggle to hold on to these high share prices. It should be noted that a number of other banks, including RBC and Goldman Sachs, see the S&P 500 growing next year, albeit at a much slower rate than it has this year.

Finally, emerging markets had a tough end of the week. Turkey cut its interest rates on Wednesday, despite rising global inflation. This sent the price of the Turkish lira down significantly, and there have since been several reports predicting higher and higher inflation, and a potential currency crisis, unless interest rates increase.

In India, Paytm went through India’s biggest ever IPO, only to see its share price fall by more than a quarter in its first day of trading.

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