Review of the week: Big ambitions, bigger uncertainties?

Good COP, bad COP?

The big moment the world has been waiting for has finally arrived. The 26^th Congress of the Parties (COP) global climate summit is now gathered in Glasgow and concrete action is now expected from a watching world.

It’s vital that COP26 reviews progress on the long-term decarbonisation goals established by the historic Paris Agreement. The 2020 deadline agreed for these goals (known as ‘Nationally Determined Contributions’ (NDCs)) was pushed back to match the pandemic–affected COP schedule. But deepening understanding of the science around climate change (and the rapid pace of action required) mean COP26 must deliver tougher commitments.

The question of who pays the cost for developing nations is also highly relevant. Under the Paris Agreement, developed nations pledged to provide $100 billion by 2020, but good progress was stalled by COVID-19.

At the G20 summit in Rome to pave the way towards COP26, G20 leaders agreed to end international financing of coal power while stopping short of plans to phase it out. They also pledged to take steps to limit global warming to 1.5C. But the deep divisions over coal (China recently ramped up coal production by more than what Western Europe mines in a year) highlight the challenges ahead at COP26. Our latest Planet Paper: Good Cop, bad Cop explores the roadmap to COP26 in full and provides a lens to show us what a good COP would look like.

A Budget for a ‘new age of optimism’?

Big ambitions also drove UK Chancellor Rishi Sunak’s third Budget, which he described as a package for a ‘new age of optimism'. Forecasts from the Office for Budget Responsibility (OBR) showing that pandemic ‘scars’ on the British economy are proving less deep than expected gave the Chancellor room to unveil big public spending plans (see InvestmentUpdate: Autumn Budget 2021)

But there’s much debate about whether the chancellor and the OBR’s forecasts of 6% growth in 2022 and 4% inflation will prove over optimistic. The OBR now thinks UK GDP will be back to its pre-COVID level by the end of the year, a very significant upgrade from its last forecast in March. Nevertheless, there’s still huge uncertainty around the full extent of eventual pandemic scarring.

Meanwhile, after its short pause in September, we expect UK inflation to pick up again in October as the 12% rise in the energy price cap takes effect. A perfect storm of factors, largely due to the disruption of both demand and supply, is then likely to push CPI inflation above 4% by the end of the year and keep it at a similar rate through to spring 2022.

Runaway inflation still seems very unlikely to us. The major cause of inflation around the world is still that we’re all spending an unusual amount on goods because it’s taking longer to spend as much on services as we did before the pandemic. Closed gyms, for example, drove a scramble to buy exercise equipment that people could use at home.

There are some signs that the goods/services imbalance is starting to correct. Service sector activity held up much better than expected in the latest business confidence (PMI) surveys: the UK service index rose from 55.4 to 58.0 in the survey covering early October.

If the Bank of England (BoE) hikes rates, it won’t bring the demand for microchips back into balance with supply or convince people to stop buying new furniture and spend more money in the cinema. We think it would be a mistake if the BoE embarked on a marked tightening cycle to combat inflation because we think the underlying causes are not something UK policy can influence.

We’re somewhat concerned, therefore, that Bank officials haven’t pushed back on the rapid change in interest rate expectations being priced into the UK gilt market. These now anticipate four to five rate hikes between November and the end of 2022, taking base rates to between 1 and 1.25%. In our opinion, this would be a significant monetary policy mistake that we do not expect the Bank to carry out. We think base rates back to 0.75% by the end of 2022 to be more realistic.

 Index

1 week

3 months

6 months

1 year

FTSE All-Share

0.5%

2.9%

5.6%

35.4%

FTSE 100

0.5%

3.5%

5.9%

34.4%

FTSE 250

0.8%

0.8%

4.3%

37.2%

FTSE SmallCap

0.0%

1.6%

5.3%

49.2%

S&P 500

1.8%

6.5%

11.8%

32.2%

Euro Stoxx

0.7%

2.1%

5.5%

35.5%

Topix

0.1%

2.5%

2.8%

9.2%

Shanghai SE

-0.7%

7.1%

5.0%

6.9%

FTSE Emerging

-1.9%

1.7%

-2.8%

8.8%

^{Source: FE Analytics data sterling total return to 29 October} These figures refer to past performance, which isn’t a reliable indicator of future returns. Investments can go up or down and you may not get back your original investment.

If you have any questions or comments, or if there’s anything you would like to see covered here, please get in touch by emailing review@rathbones.com. We’d love to hear from you.

View a PDF version of Review of the week.

Bonds
UK 10-Year yield @ 1.03%
US 10-Year yield @ 1.56%
Germany 10-Year yield @ -0.11%
Italy 10-Year yield @ 1.14%
Spain 10-Year yield @ 0.62%

Economic data and companies reporting for week commencing 1 November

Monday 1 November

UK: PMI Manufacturing
US: PMI Manufacturing, ISM Manufacturing, Construction Spending

Full-year results: Agriterra, Brighton Pier, Harland & Wolff, Int.biotech, Lok N Store, Pensana
Interims: Challenger, Ryanair, Victoria Oil & Gas

Tuesday 2 November

US: Auto Sales
EU: PMI Manufacturing

Full-year results: Oncimmune, UpGlobal
Interims: BP Marsh

Wednesday 3 November

UK: Nationwide House Price Index
US: MBA Mortgage Applications, Crude Oil Inventories, Factory Orders, PMI Composite, PMI Services, ISM Prices Paid, ISM Services
EU: Unemployment Rate

Full-year results: Nanoco
Interims: Braemar Shipping, Esken, Trainline

Thursday 4 November

UK: PMI Construction, BoE Interest Rate Decision
US: Initial Jobless Claims, Continuing Claims, ISM Prices Paid
EU: PMI Services, PMI Composite, Producer Price Index,

Full-year results: Gattaca
Interims: BT, Electrocomponents, J Sainsbury, Wizz Air

Friday 5 November

UK: Halifax House Price Index
US: Non-farm Payrolls, Unemployment Rate, Consumer Credit
EU: Retail Sales

Interim results: Kainos Group