Inflation worries in London
The London Stock Exchange has been experiencing a real price rally for months, but now a correction was due. Much currently depends on the British government’s monetary policy.
Dhe London Stock Exchange has seen an upward trend since winter, with the FTSE 100 share barometer for large companies climbing from below 6,000 points in December to 7,217 points. However, after this level last week, the highest in a year, a correction set in. This is also related to investors’ concerns about inflation and a monetary policy that is therefore less relaxed. However, the index holds just over 7000 points. On Monday and Tuesday, the London Stock Exchange rose again slightly, each by 0.2 percent. The FTSE 100 was just under 7080 points on Tuesday.
There was movement at the beginning of the week, especially in the shares of supermarket groups. The US investment firm Clayton Dubilier & Rice has offered £ 5.5 billion (6.4 billion euros) for a takeover of Wm Morrisons Supermarkets. The group, with 118,000 employees, is one of the UK’s largest grocery retailers after Tesco.
Morrisons initially rejected CD & R’s takeover initiative. On Monday, the Bradford Group’s share price shot up by a good 30 percent. The other supermarket groups were also up 1.6 percent (Tesco) and almost 4 percent for Sainsbury and Ocado. That move alone helped the FTSE 100 on Monday.
Since the beginning of the year, the FTSE 100 share index of the hundred large companies that are highly multinational has risen by 12.6 percent. The FTSE Small index of the small stocks that earn their money primarily on the British market and benefit from the domestic economic recovery rose even more sharply, namely by 18.7 percent. The weaker FTSE 100 result is also due to the fact that the pound exchange rate has recovered somewhat since the beginning of the year. Against the dollar, the pound rose at times to more than $ 1.40 – the highest level in a good three years. If the pound is strong, the gains made abroad are worth less; this slows the price increase of the FTSE-100 values.
Nevertheless, the British stock market was among the strongest this year in an international comparison, as the investment bank Goldman Sachs shows in an overview: only the French CAC 40 rose a little more – in pounds sterling terms – the Dax rose less in sterling terms 8.6 percent).
The strong London Stock Exchange reflects the country’s economic recovery, which is mainly driven by the successful vaccination campaign and the opening it allowed after the third lockdown. After a record recession with a drop of 10 percent in the first Corona year, the gross domestic product could increase by more than 7 percent this year, the OECD estimates. The British Chamber of Commerce BCC has even increased its forecast to more than 8 percent. The pre-crisis level of economic activity should be reached again by the end of this year.
The vigorous recovery, which is being boosted by the loose monetary policy and the government spending and support programs, also has a downside: Quite a few in the market are now talking about possible overheating and inflation risks. The outgoing chief economist of the Bank of England, Andy Haldane, already sees the danger of a wage-price spiral. Two weeks ago he warned that Britain was “at the most dangerous point” for monetary policy in three decades. According to the latest data from the statistical office, the inflation rate rose from 1.5 to 2.1 percent in May, well above the 1.8 percent expected by analysts. The central bank and many economists expect the inflation rate to climb up to 3 percent this year. In the USA, the inflation rate is rising to almost 5 percent, also driven by more expensive fuel prices.
Andy Haldane, who is leaving the Fed this month to take on a new post at the Royal Society of Arts, wanted to cut the ultra-loose monetary policy and cancel the remaining £ 50 billion bond purchases a month ago, but the rest of the Central Bank Council disagreed . All other eight members voted against him.
The next meeting of the Central Bank’s Monetary Policy Committee (MPC) is scheduled for Thursday. Economist George Buckley, who works for the Japanese Nomura investment bank, sees the possibility that Haldane will attract a few more MPC members to his side at his last meeting. “There is the real risk,” he says, “that the outgoing chief economist will take other members of the panel and that there will be a split in the committee.” Inflation ”should not be left unanswered.
The BoE’s key interest rate has been only 0.1 percent since the beginning of the Corona crisis, and it has also expanded its bond purchase target to almost £ 900 billion – relative to GDP, that’s almost the dimensions of the ECB’s purchase program. It is unclear how strong and permanently the price pressure will increase in the Kingdom. Lloyds Bank published an overview of price increases in fourteen industries. Accordingly, the price dynamic was stronger than it has been for 22 years. Should the BoE announce a change of course and reduce or even turn off the warm money rain, that would arrive as a cold shower on the stock markets. But it’s not that far yet. It is more likely that the MPC majority will stick to the expansionary course. Goldman Sachs predicts that the FTSE 100 will hit 7600 points in twelve months.