Why fear of growth setback has spooked investors
News of a potentially fast-spreading new coronavirus variant has already triggered a violent reaction on markets and in a number of different asset classes.
While much attention has naturally alighted on equity markets, with big falls in the FTSE-100 and continental European indices such as the DAX in Germany and the CAC-40 in France, probably the most significant move has been in the oil price.
At one point this morning, the price of a barrel of Brent crude fell to $77.28 – a level it has not seen since 24 September.
And, while a new coronavirus variant is undoubtedly unwelcome news, the fall in the price of oil may be one piece of good news emerging from the situation.
For a start, because oil prices move in close correlation to the price of other energy sources such as natural gas, a big decline will relieve inflationary pressures.
News of a fresh coronavirus variant has triggered a violent reaction on markets, including the FTSE 100
These, as was shown by this week’s co-ordinated release of crude reserves by the US, China and others, have been exercising governments in a number of countries.
It has also been exercising policy makers. The Bank of England has been dropping ever heavier hints of a looming increase in interest rates and, while it surprised the markets by not raising its main policy rate this month, at least one rise was being priced by the end of February next year.
But a sustained decline in the price of oil – and the threat to growth posed by the new variant – will relieve pressure on the Bank of England to act quickly and especially at a time when a number of members of the Bank’s Monetary Policy Committee are still extremely wary of the possible impact of even a modest increase in Bank Rate.
That is also the calculation markets have been making this morning about the US. Yields on US Treasuries (US government IOUs) have fallen this morning – the yield falls as the price rises – as investors started to reconsider the likely timing of the next rise in US interest rates.
The odds against an early rate hike from the US Federal Reserve had been shortening since, on Monday, President Joe Biden reappointed Jay Powell as chairman of the Fed rather than going for the more dovish Lael Brainard.
Those bets have now started to unwind as some investors calculate the spread of a new coronavirus variant could push back the timing of the Fed’s first hike.
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Bank of England governor Andrew Bailey explains why it decided to hold interest rates at 0.1% – despite predicting inflation will hit 5% next year
A bigger concern, when it comes to the potential impact of another COVID variant, will be Europe. The main European economies have not rebounded from the pandemic as rapidly as the United States, as borne out on Thursday by confirmation of weaker-than-expected GDP growth in the third quarter of this year in Germany, the continent’s biggest economy.
Those concerns also apply to the UK, whose economy is further away from recapturing its pre-pandemic levels than any other country in the G7, other than Japan.
What is particularly striking about market reaction to this new variant is that it has been far more violent than the response, earlier this week, to new COVID lockdowns in Austria, Slovakia and other parts of continental Europe. On that occasion, investors calculated that spending prevented from taking place due to lockdowns would be merely deferred, not postponed altogether.
Markets around the world were down on Friday as news of a worrying new variant spooked investors
With the new variant, as so little information is currently available about the speed with which it can be transmitted and the impact it will have on sufferers, the same assumption cannot be made.
That explains the punishment meted out this morning to aviation stocks, such as International Airlines Group (IAG) and Lufthansa and tourism-related stocks, such as TUI, Intercontinental Hotels and Whitbread, the owner of the Premier Inn chain.
But it cannot be stressed how unknowable the situation is.
As Neil Shearing, group chief economist at the consultancy Capital Economics, put it in a note to clients this morning: “It goes without saying that it’s still too early to say exactly how big a threat the new B.1.1.529 strain poses to the global economy.”
Mr Shearing said there were three key points to make, though, the first of which is that – as Delta showed – it is very hard to stop the spread of virulent new variants. Secondly, it is the restrictions imposed in response to the virus, rather than the virus itself, that causes the bulk of the economic damage.
Thirdly, he said, the global economic backdrop is different than in previous waves, with supply chains already stretched, while labour shortages are widespread.
He added: “All of this will complicate the policy response. At the margin, the threat of a new, more serious, variant of the virus may be a reason for central banks to postpone plans to raise interest rates until the picture becomes clearer.
“The key dates are 15 December, when the Fed meets, and 16 December, when several central banks, including the Bank of England and European Central Bank, meet.
“But unless a new wave causes widespread and significant damage to economic activity, it may not prevent some central banks from lifting interest rates next year.”
Much will depend on what information comes from the World Health Organisation in coming days and how governments respond.
As Jim Reid, head of global fundamental credit strategy at Deutsche Bank, noted today: “At this stage very little is known. Mutations are often less severe so we shouldn’t jump to conclusions but there is clearly a lot of concern about this one.
Also South Africa is one of the world leaders in sequencing so we are more likely to see this sort of news originate from there than many countries.
“Suffice to say at this stage no one in markets will have any idea which way this will go.”
Exactly. At the moment, travel bans have only been imposed to and from six southern African countries. It may well be that, if the new variant has already taken hold elsewhere, there may be little point in imposing new travel restrictions.
But this is not a situation many investors either expected or wanted to return to. They have seen this story before. And they do not wish to be caught out in the way they were during earlier waves of the pandemic.
The Post Office is drawing up plans to close dozens of branches and axe hundreds of head office jobs as it tries to place its finances on a sustainable long-term footing.
Sky News has learnt that the state-owned company is preparing to announce in the coming days that it will shut or seek alternative franchising arrangements for more than 100 wholly owned branches.
The affected branches collectively employ close to 1,000 people and are said to be significantly loss-making.
A significant number of jobs – believed to be in excess of 1,000 – are also understood to be at risk at the Post Office’s headquarters. Further details of where the axe would fall were unclear on Tuesday afternoon.
Whitehall insiders said that the government had been consulted on the plans, which come as ministers explore the possibility of handing ownership of the network to thousands of sub-postmasters across Britain.
They added that union officials had also been briefed on the proposals, with one suggesting that an announcement could come as early as Wednesday or Thursday.
The cost-cutting measures are said to be designed to help the Post Office stem substantial financial losses, with the company requiring an annual government subsidy to stay afloat.
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Ministers to mutualise Post Office
One government source said the plans should be seen in the context of comments made by Jonathan Reynolds, the business secretary, on Monday at the public inquiry into the Horizon IT scandal.
Giving evidence, Mr Reynolds said: “I think despite the scale of this scandal, the Post Office is still an incredibly important institution in national life.
“I look at the business model of the Post Office, and I think even accounting for the changes in the core services that are provided … there’s still a whole range of services that are really important.
“But I don’t think postmasters make sufficient remuneration from what the public want from the Post Office, and I think that’s going to require some very significant changes to the overall business model of the Post Office.”
Improvements to the pay and working practices of sub-postmasters are expected to be announced imminently, the government source added.
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The 364 year-old institution has been engulfed in crisis since the scale of the Horizon scandal became clear, with hundreds of sub-postmasters wrongly prosecuted for theft and fraud offences.
Brought to a wider public audience by the ITV drama ‘Mr Bates vs The Post Office’, it has been labelled Britain’s biggest miscarriage of justice.
Many of those affected suffered ill health, marital breakdowns or died before they were exonerated.
Former chief executive Paula Vennells, who insisted for years that the Horizon system was robust, was effectively stripped of her damehood in disgrace earlier this year.
Last month, Sky News revealed that the Department for Business and Trade (DBT) has asked BCG, the management consultancy, to examine options for mutualising the Post Office.
BCG’s work is expected to include assessing the viability of turning the Post Office into an employee-owned mutual, a model which is used by the John Lewis Partnership.
The Post Office is Britain’s biggest retail network, with roughly 11,500 branches, with the public’s shareholding managed by UK Government Investments (UKGI).
In recent months, calls for a review of the company’s ownership model have grown amid a corporate governance fiasco at the company.
In January, Henry Staunton, the chairman, was sacked by Kemi Badenoch, the then business secretary.
Mr Staunton subsequently disclosed an investigation into bullying claims against Nick Read, the Post Office’s chief executive, which the organisation said in April had exonerated him.
Mr Read, who has since resigned, was accused of constant attempts to secure pay rises, even as sub-postmasters were facing protracted delays to their entitlement to compensation after being wrongfully convicted.
As part of their efforts to repair the Post Office’s battered finances and reputation, the government has parachuted in Nigel Railton, a former boss of National Lottery operator Camelot, as its chairman.
A Post Office spokesperson said: “We will set out a “new deal” for postmasters and the future of the Post Office as an organisation.
“It will dramatically increase postmasters’ share of revenues, strengthen our branch network and make it work better for local communities, independent postmasters and our partners who own and operate branches.”
The UK’s jobless rate has risen by more than expected, raising questions over whether the new government’s early warnings on the state of the economy have backfired.
Official figures from the Office for National Statistics (ONS) showed the unemployment rate at 4.3% over the three months to September.
That was higher than the 4.1% figure expected by economists and up on the 4% reported a month earlier.
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The data also showed that average regular earnings growth had fallen to its lowest level since April-June 2002, easing to 4.8% from 4.9%, though it continued to outstrip the pace of inflation.
Wider figures showed a fall, of 5,000, in the numbers in payrolled employment during the month of September.
Commentators on the economy suggested that the jobless rate figure could be a blip – a consequence of continuing poor engagement with the ONS Labour Force Survey which collects the information.
They also said that the earnings growth rate – a key concern of the Bank of England’s in the inflation battle – was propped up only by public sector pay rises, suggesting that private sector awards were continuing to ease.
However, others said there could have been an influence from the new government’s claims, since late July, of a dire economic inheritance including a £22bn black hole in the public finances.
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July: Chancellor outlines ‘black hole’
Both Prime Minister Sir Keir Starmer and his chancellor, Rachel Reeves, stated widely during the election campaign their priority was boosting economic growth through a new partnership with business.
But they warned within weeks of taking office of “tough” decisions ahead, while taking some immediate action including cutting the universal winter fuel payment.
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‘Mini fiscal event was unnecessary’
A budget was slated for 30 October.
That first major fiscal event for Labour in 14 years, delivered three months after the gloomy messages first emanated from Downing Street, prompted a business backlash as it put employers firmly on the hook for part of a £40bn additional tax take.
The private sector has since warned that the measures, which include hikes to national insurance contributions by employers, will hit investment, hiring and pay awards, leaving all the talk of partnership with the government in serious doubt.
Danni Hewson, AJ Bell’s head of financial analysis, said of the ONS data: “This latest set of jobs data puts in black and white what businesses and workers have been feeling… Over the last few weeks, businesses have been warning that the increase in national insurance coupled with another chunky hike in the national living wage could result in job cuts.
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“Even before the budget, uncertainty about what taxes might rise eroded confidence and many employers pushed back investment decisions or halted hiring plans until they could assess the road ahead.”
Isaac Stell, investment manager at Wealth Club, said: “A pickup in the unemployment rate may start to ring alarm bells in the halls of Westminster as the rate for September exceeded expectations by some margin.
“This increase serves as a warning sign to the government following on from the budget where businesses saw a large increase in the level of national insurance contributions they will have to pay.
“If these additional costs restrict hiring and cause jobs to be lost, its so-called growth agenda will be further scrutinised,” he wrote.
Work and Pensions Secretary Liz Kendall said of the pay data: “While it’s encouraging to see real pay growth this month, more needs to be done to improve living standards too.
“So, from April next year, over three million of the lowest-paid workers will benefit from our increase to the national living wage.”
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