- Markets in the red as China crackdown on tech companies threatens to expand
- Gold rush in Japan
- Tesla beats expectations
China crackdown weighs
Shares in London took a dive at the open this morning with the FTSE100 down around 1.4 per cent in early trading, taking it well below the 7,000 level. Equity traders appear to be unnerved by further signs of regulatory crackdown in China. What started with a number of tech companies which the government was obviously keen to reassert some authority over spread over the weekend as the government banned educational tuition companies from making a profit or listing on public markets. China’s private education sector is said to be valued at around $100bn. Meanwhile tech stocks continue to sell off with investors dumping holdings of long term favourites such as Tencent and Alibaba over fears of further government intervention. Asian markets fell heavily yesterday in response as traders nervously eye the next move. Read Lauren Almeida’s news analysis from last week in which she looked at the implications for emerging markets investors.
Such concerns overshadowed what appear to be the first potential chinks of light for the UK as it battles the latest wave of covid infections led by the Delta variant. New cases have fallen sharply again and have now been on a downward trajectory for the past week. While the government is refusing to count its chickens, and the lag effect means the hardest weeks are probably still ahead for the NHS, the falling case numbers offer hope that the worst of this wave might be over and, with it, the ‘pingdemic’ which has hobbled large parts of the economy may begin to ease.
Inflation risks
Will renewed optimism around covid cases further fuel the economic recovery? The EY Item club this morning forecast that the UK economy will grow faster this year, at 7.6 per cent, than it has in 80 years. How will this feed into inflation though? And should investors be worried. With the CPI measure of inflation already at 2.5 per cent and rising could the Bank of England come under pressure in the second half of the year to raise interest rates? And also, should investors even be worried about inflation - our resident economist Chris Dillow asks this very question in his latest analysis this morning.
For companies, the signs of inflation in supply chains are already showing through with Reckitt Benckiser shares falling heavily on Tuesday in response to news that although revenues had risen 3.7 per cent to £6.3bn operating profits were 1.5 per cent lower at £1.4bn due to a combination of investment in the business and rising input costs. Management expects full year margins to be down by between 0.4 and 0.9 per cent, dependent on how much of the input cost rises can be passed on via price increases.
See also, Chris Dillow’s take on the long term effect of Covid on the UK economy:
Can Japanese delight carry the markets?
Two British gold medals in 20 minutes - including a victory for Tom Daley 13 years in the making - has conjured the spirit of optimism that only an Olympics can bring. Imagine how they must be feeling in Japan with eight gold medals on the board in a performance which saw the home nation top the table after day three.
Considering the widespread criticism of the games from the Japanese public, a rising number of citizens seem to be emerging from another bout of lockdown to support their athletes in venues which allow entry. Elated fans took to the Ariake urban sports park to watch Yuto Horigome and Momiji Nishiya bring home the gold in the mens and womens street skateboarding finals. Naomi Osaka ditched her displeasure for the games when she lit the flame in the opening ceremony, although it may have returned now that she has been knocked out of the ladies tennis singles.
But a feeling of goodwill won’t deliver the economic success that the country needs after decades of stagnation and a terrible pandemic. Even the most seamless Olympics rarely bring financial reward to the host nation and even with the home nation victories, Tokyo 2020 can hardly be described as seamless.
For now, Olympic joy hasn’t catapulted the markets, but having cruised through 28,000 points earlier this year for the first time since the 1990s, the Nikkei continues to enjoy decent stability. But lessons from Japan's market history bring warnings of the dangers of over-optimism.
Tesla revs up
Electric car leader Tesla posted quarterly sales of more than $1.1bn despite an ongoing semiconductor shortage which is hampering supply chains for automotive manufacturers. Chief executive and founder Elon Musk said: ‘Never seen anything like it. Fear of running out is causing every company to over-order. Like the toilet paper shortage, but on an epic scale.’ Musk also disappointed market watchers who follow his pronouncements closely by saying he will be taking more of a back seat when it comes to media calls around company results in future.
Musk’s enthusiastic embracing of cryptocurrencies has added to his reputation for taking risky bets, although a $23m impairment charge against the value of bitcoin held by the company in Tesla’s latest accounts illustrated the volatility inherent in crypto investing.
On an operational level, Tesla continues to mature with deliveries topping 200,000 again in the three months to June, ahead of expectations, and margins in the auto part of the business have now risen by 10 per cent over the past two years even as price points have reduced with the average selling price across the business now 10 per cent lower than it was two years ago.
Read more:
Carmakers focus on electric future as chip shortage drags on
UK government spent £1.2m a week subsidising Tesla cars
Games Workshop beats logistical disruption
Full-year figures from Games Workshop (GAW) show that hobbyists have probably enjoyed the lockdowns in a sense, as the producer of fantasy miniatures booked revenues of £353m for the year to 30 May 2021, up from £270m in 2020, while pre-tax profits went from £89.4m to £151m over the same period. But it hasn’t all been plain sailing, as logistical delays meant that deliveries to its Continental European customers were well below expectations during the opening months of 2021. But the company is nearing launch of its bespoke subscription service, Warhammer +. And despite a challenging year, chief executive Kevin Rountree reckons that “the Warhammer hobby and Games Workshop are in great shape”. MR
House prices one third higher than pre-financial crisis
The UK housing market recovery has been pretty much a decade long affair now. Fuelled by government subsidy and low interest rates, house prices have now surged to a level where the average UK home is selling for £230,700 according to Zoopla, which is 5.7 per cent higher than a month previously and a whole 30 per cent above the peak seen before the financial crisis tore through the global economy in 2008-2010.
Supply, or lack of it, appears to be the main driver in the current market with the number of new homes coming to market in the opening months of 2021 down by a quarter on the previous year while demand has doubled according to Zoopla, with family homes the most in-demand. Tellingly there are strong regional differences, with Northern Ireland and Wales seeing strong growth but the previous powerhouse London market proving less strong. Notably in London the pandemic effect is being felt with demand in the leafier suburbs far oustripping central London demand.
