Week in Review: FTSE down after pessimistic Bank of England assessment

FTSE news

The FTSE 100 index was down fractionally on Thursday (23 September) on the back of hawkish comments from the Bank of England, which sees inflation peaking above 4% this year, heightening chances of monetary policy action. The blue-chip index rose in early trading but lost ground later in the day, to end the session down slightly by 0.07% to 7,078.35.

• Monday (27 September) is a quiet day, with nothing of note in the company and economic calendar.
• On Tuesday (28 September) Zoopla releases its monthly house price index.
• The Bank of England will give insight into lending conditions when it publishes its latest money and credit data on Wednesday (29 September).
• The Government plans to pull much of its Covid-19 economic support on Thursday (30 September), with the furlough scheme, lower VAT rates for hospitality firms and stamp duty reduced rate due to end.
• CIPS/Markit updated on conditions in the UK’s manufacturing sector on Friday (1 October).

Sector in focus

The Evergrande crisis has exploded onto markets this week, as it emerged the gargantuan Chinese house builder was in serious financial strife, causing market fallout across the world.

It comes because of policy decisions by the Chinese state which sees firms like Evergrande as too big and influential. The company currently builds more than 15 million homes a year, and the country has enough excess housing capacity to home the entire populations of European countries such as France or Germany.

The current crisis stems from the firm’s inability to pay back several major creditors. It has over $300 billion in debts. The scale of the problem is such that it is already spreading to other parts of the globe.

Markets in the UK have not been unaffected by the contagion over the course of the week. Because the nature of the issue with the firm, the financial system is coming under intense scrutiny from investors.

Firms such as HSBC (HSBA), Standard Chartered (STAN) and Prudential (PRU) have seen their share price swing wildly, thanks to their heightened exposure to Asian markets.

The crisis is not over so it remains to be seen how much more damage could be done. Per a report in the WSJ today, the Chinese government would seem to be prepared to let the company fail, ordering local officials to prepare for a “possible storm”.

Some commentators have already gone as far as to call the event ‘China’s Lehman Brothers moment’.

Economic update

So-called ‘Super Thursday’ passed with relative ease in central bankers’ terms. With a swathe of Western countries reporting bank rate decisions, all eyes fell on the Bank of England’s (BoE) latest policy decision.

The BoE has not announced any changes to its policies, maintaining the rate at 0.1% while continuing its bond buying ‘quantitative easing’ (QE). But the bank has warned of above 4% inflation by the end of the year and has raised the prospect of an early rate rise.

Indeed, it has warned a rate rise may be needed to quell price rises sooner rather than later, setting expectations of a rate hike ahead of the US Federal Reserve (Fed). This is unusual – the Fed typically sets the agenda, in Western terms at least, for what central banks should be doing.

That the BoE sees the need for action sooner would suggest it sees bigger issues ahead than expected. The twin effect of soaring inflation and crumbling consumer confidence – which the BoE has now warned of – could lead to Stagflation, a pernicious economic problem not seen since the late 70s.

Needless to say, the UK economy is not there yet. But the latest announcement from the Old Lady of Threadneedle Street should serve as a clear warning for markets that policy action could very soon be back.

Fund watch

While it is impossible to predict what happens in markets, one of the best ways to protect against volatility is diversification. A good fund to hold if you’d like to diversify your portfolio is Fidelity Index World P Acc (GB00BJS8SJ34). This fund tracks the MSCI World Index which tracks a highly diversified selection of the world’s top stocks. The find has returned 85.9% in five years and charges an OCF of just 0.12%.

ETF watch

If you’d like an ETF alternative, try the HSBC MSCI World ETF (HMWO). This ETF does the same, tracking the performance of the MSCI World index, a highly diverse selection of companies. This ETF has returned 88.3% in five years and charges an OCF of 0.15%.

Company announcements

29 September – Clothing and homeware retailer Next plc (NXT) reached a deal with Gap Inc to run the clothing chain’s business in the UK and Ireland. The joint venture means Gap will continue to have a presence here despite earlier this year revealing it planned to close its 81 stores in the UK and Ireland. Investors will want to know more about how Next plc (NXT) plans to integrate the US firm into its operations when it publishes its interim results on Wednesday (29 September).

1 October – Pub chain J D Wetherspoon plc (JDW) has been dogged by beer shortages in recent weeks, as global supply chain problems continue to bite. The shortages threaten to derail the chain’s recovery from coronavirus now the Government has removed its pandemic restrictions. The firm publishes its full-year results on Friday (1 October).