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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Stock markets and bitcoin fall amid Ukraine worries and US interest rate rise fears – as it happened

United Kingdom United States Ukraine Omicron Europe Russia Germany US Federal Reserve IHS Markit France
Traders on the floor of the New York stock exchange.
Traders on the floor of the New York stock exchange. Photograph: Brendan McDermid/Reuters

After that astonishing turnaround on the New York stock market, it’s time to wrap up. Goodnight! GW

The Dow Jones industrial average also rebounded strongly. Having been down over 1,000 points at one stage, it finished 99 points, or 0.3% higher.

Wall Street closes higher after recovering steep losses

Ding ding! The Wall Street closing bell has rung.... and stocks have clambered off the mat to stage a remarkable recovery.

Having tumbled into correction territory earlier, the S&P 500 index rebounded from its steep selloff to close 0.3% higher.

Bloomberg calls it a ‘breathtaking’ recovery:

A stock selloff that at one point rivaled any of the last two years was all but wiped out as dip buyers emerged by Monday’s close, the latest breathtaking reversal in markets rattled by geopolitical tensions and the Federal Reserve’s campaign against inflation.

Retail, industrial and energy companies led a rebound in the S&P 500 into the close after the gauge tumbled as much as 4% earlier in the day. The dollar gained, while 10-year Treasuries were little changed.

The Nasdaq 100 technology index has closed 0.5% higher, having been down more than 4% at one stage of today’s nervy session.

Reuters reckons that bargain hunters pushed the indexes into positive territory, adding:

“I would not be surprised if today is the low point for the major averages,” said Sam Stovall, chief investment strategist of CFRA Research in New York.

Still, Stovall added that January is often a barometer for the rest of the year.

“As goes January, so goes the year,” Stovall added. “A negative January in 2022 along with a negative first five days of the year would not bode well for the entire year’s performance.”

Here’s some reaction:

After posting steep losses earlier, the US stock market is staging a late recovery!

The Dow Jones industrial average is now down just 168 points, or 0.5%, in late trading while the tech-focused Nasdaq is almost flat for the day....

The Nasdaq 100 index of tech stocks is on track for its worst January performance ever, surpassing even the 2008 losses, says Bloomberg.

Here’s their take on this month’s market selloff:

Nasdaq 100 Index’s worst start ever to new year, S&P 500 Index losing 10% and Russell 2000 approaching bear market -- the global stock selloff is gathering pace and the market value losses on Monday alone are now ballooning to almost $3 trillion.

Food and drink shortages possible as UK support for CO2 industry ends

British producers have raised fears of beer and burger shortages and higher prices for shoppers after the government said it would stop propping up the CO2 industry.

A three-month deal to support the UK’s main producer of the gas, brought in as an emergency measure after a crisis in the autumn, ends next week and it is understood it will not be renewed.

The government provided a temporary bailout to CF Fertilisers, which accounts for 60% of the UK’s CO2 supplies, to counter the threat of chaos in supply chains, after its US owner shut its factories amid the soaring cost of natural gas.

Any holdup in supplies would affect soft drinks and bakery producers as well as meat processors and brewers, who all use CO2 in making and packaging their goods.

Our energy correspondent Jillian Ambrose has analysed the impact that rising tensions between Russia and Ukraine could have on the UK’s gas supplies, and those of continental Europe:

How vulnerable are the UK’s gas supplies?

The good news is that the UK imports barely any gas from Russia. It meets about half of its gas requirements from the North Sea, while another third is sourced from Norway. The rest is imported by pipelines connecting the UK to Europe, or in the form of liquified natural gas (LNG), which is transported by tankers typically from Qatar or the US.

The bad news? The UK’s gas sources could all becoming eye-wateringly expensive if markets in Europe soar. The UK’s market is closely connected to markets in Europe, so a price rise in Germany or the Netherlands would lead to higher prices in Britain.

There is no end in sight to Europe’s gas market woes. The US investment bank Goldman Sachs said on Monday:

“The high energy prices seen in recent months are not necessarily a one-off.”

Gas prices are likely to stay twice as high as normal until 2025, it said, and if Europe faces colder than average temperatures in March and February, blackouts could be likely.

How vulnerable are Europe’s gas supplies?

Very. Russia typically supplies about a third of Europe’s gas via a complex network of pipelines that run through Ukraine, Belarus and Poland to Germany. From Germany, pipelines carry gas to the rest of western Europe and through to the UK.

A major gas supply disruption to Ukraine, last seen in 2008, could cause severe market volatility and a shutdown of factories to help conserve gas. Market experts at S&P Global warned that “any conflict impacting gas supplies into Europe could have knock-on impacts on power, carbon and coal prices”.

At the same time, Europe may become more dependent on gas to run its gas power plants after EDF warned that it would reduce the electricity it generates from nuclear power by 10% this year because of technical problems at a handful of its reactors.

Updated

Aviva Investors, an important UK asset manager, has put the directors of 1,500 companies on notice that it is willing to seek their removal if they fail to show enough urgency in tackling issues including the climate crisis and human rights.

The firm said the way it votes on the re-election of company board members in the upcoming AGM season would be heavily influenced by its four key stewardship priorities for the year, which also include biodiversity and executive pay.

In its annual letter to 1,500 companies in 30 countries including the UK, Aviva Investors urged companies to develop their own biodiversity action plans, publicly state their commitment to human rights, with appropriate due diligence, and ensure that executive pay plans – particularly bonuses – are linked to its four stewardship priorities.

More here:

Worst day for European markets in over a year

Stock markets across Europe have racked up heavy losses today, ending at the lowest level since October.

Fears of conflict in Ukraine unnerved investors, adding to their concerns about looming US interest rate rises.

The pan-European Stoxx 600 index has closed 3.8% lower, its biggest one-day fall since June 2020.

Germany’s DAX fell by 3.8%, while France’s CAC index lost 4%.

David Madden, market analyst at Equiti Capital, says:

Traders continue to be in selling mode as fears mount surrounding the Russia-Ukraine situation. Also playing into the mix are the concerns the Federal Reserve will issue a hawkish update on Wednesday.

The growing Russian military presence on the Ukrainian border is adding to the speculation there will be an invasion, and those fears have been fuelled by the news that UK and US embassy staff in Ukraine have been instructed to leave the country. Dealers are worried about the prospect of a war in Eastern Europe as the human and economic cost would be huge.

Some central European economies like Germany are heavily dependent on energy from Russia, and should a war break out, it’s a possibility those energy supply lines would be cut, which would cripple economic output in the EU.

FTSE 100 loses £53bn

Today’s selloff has wiped £53bn off the value of the FTSE 100 index.

Wall Street is sliding deeper into the red.

The Dow Jones industrial average has now lost 930 points, or 2.7%, to 33,335, while the Nasdaq Composite has fallen 4%.

FTSE 100 closes at one-month low

After a rough day’s trading, the UK’s blue-chip stock index has closed at its lowest level in a month.

The FTSE 100 index ended the day down 197 points, or 2.6% at 7297. That’s its worst fall since 26th November, when the Omicron variant sent markets reeling.

Educational publisher Pearson led the fallers, down 9.1%, followed by housebuilder Barratt Development (-8.9%), tech-focused investor Scottish Mortgage Investment Trust (-8.5%), and Russian steel maker Evraz (-8%).

The smaller FTSE 250 index of medium-sized firms had its worst day since September 2020, tumbling 3.6% to its lowest level since March 2021.

Bloomberg’s Tim Stenovec has more details of the US stock market selloff:

Today has brought another woeful start to trading on Monday, as heightened geopolitical risk compounds investor anxiety and drags on risk assets.

So says Craig Erlam, senior market analyst at OANDA, who explains this could be a pivotal week for markets:

It could be a make or break week for the markets, with the Fed meeting on Wednesday, big tech earnings, and ongoing tensions on the Ukraine/Russia border. That may sound a bit over the top given how deep a correction we’ve already seen, particularly in the Nasdaq, but it could get much worse before it gets better.

Wednesday is going to be massive. The Fed needs to strike the right balance between taking inflation seriously and not wanting to cause further unnecessary turmoil in the markets. Not an easy balancing act when four hikes are already priced in, alongside balance sheet reduction, and some are arguing it’s not enough.

That’s a lot of pressure for a meeting that’s not really live but investors will be hanging on every single word. It won’t take much for the Fed to add to the anxiety but if they manage to strike the right chord, it could help settle the markets and draw investors back in.

And then there’s earnings. Netflix got things off to a rotten start for big tech but there’ll be plenty of opportunities to turn that around this week. The Nasdaq has fallen more than 16% from its highs and sits very close to bear market territory. Will investors be tempted back in at these levels if the other big tech names deliver?

Whatever happens, it promises to be a really interesting week in the markets and one that could go terribly wrong or be the turning point. Perhaps that’s oversimplifying things but when fear is in control as it seems to be now, it creates these kinds of extremes.

The Russian rouble has weakened to its lowest level in over a year, as soaring tensions between Moscow and the West over Ukraine hits Russian assets.

The rouble has dropped by 2% today to around 79 to the US dollar, the lowest since November 2020.

The pressure on the rouble led the Bank of Russia to halt purchases of hard currencies (Bloomberg has more details).

Shares tumbled in Moscow today too. The MOEX index of Russian companies fell almost 6%, hitting its lowest level over a year. It’s fallen by 15% since the start of 2022.

Russian government debt also fell, pushing up Russia’s 10-year bond yields hit 9.76%, their highest since early 2016, Reuters reports (yields move inversely to prices).

Stocks in the US have fallen further, with the S&P 500 dropping over 2%.

That put the broad index of US stocks into correction territory (more than 10% off its record high, set at the start of January).

The Nasdaq also fell further, and was down 3%.

US private sector growth slumped to 18-month low

Growth across the US private sector has slowed sharply to its lowest rate since July 2020, in a sign that the Omicron variant has weakened America’s recovery.

US output growth slowed to an 18-month low in January as the Omicron wave exacerbates supply delays and labor shortages, data firm IHS Markit reports.

Its flash US Composite Output Index has dropped to 50.8, a sharp tumble on December’s 57.0, close to the 50-point mark showing stagnation.

The slowdown in output growth was broad-based, with both manufacturing and service sector firms reporting that output nearly stalled this month.

Covid-19 cases in the US hit record levels at over one million a day earlier this month, leading to labour shortages and supply chain disruption.

Chris Williamson, chief business economist at IHS Markit, said:

“Soaring virus cases have brought the US economy to a near standstill at the start of the year, with businesses disrupted by worsening supply chain delays and staff shortages, with new restrictions to control the spread of Omicron adding to firms’ headwinds.

“However, output has been affected by Omicron much more than demand, with robust growth of new business inflows hinting that growth will pick up again once restrictions are relaxed. Furthermore, although supply chain delays continued to prove a persistent drag on the pace of economic growth, linked to port congestion and shipping shortages, the overall rate of supply chain deterioration has eased compared to that seen throughout much of the second half of last year.

Wall Street drops at the open

The floor of the NYSE in New York.
The floor of the NYSE in New York. Photograph: Brendan McDermid/Reuters

US stock indexes have dropped at the start of trading, as soaring tensions between Russia and the West over Ukraine worry investors.

Shares are under pressure, ahead of the key Federal Reserve policy meeting on Wednesday that could cement expectations of a March interest rate rise.

The Dow Jones Industrial Average of 30 large US companies is down 386 points, or 1.1%, at 33,878 points. Boeing (-3.5%), Disney (-2.9%), Goldman Sachs (-2.7%) and Visa (-2.3%) are leading the fallers.

The S&P 500 is down 1.5%, as is the tech-focused Nasdaq Composite.

The UK’s smaller stock index, the FTSE 250, is having a torrid day.

The index of mid-size companies has tumbled by 3.25% today, down 723 points at 21540 points.

That’s its lowest level since the end of March 2021, and on track for its worst day in over a year (although it could yet recover some ground).

The FTSE 250 over the last two years
The FTSE 250 over the last two years Photograph: Refinitiv

Cinema chain Cineworld (-13%) and cyber security firm Darktrace (-12.3%) are the top fallers.

Updated

Wall Street is set for a sharper drop at the open, with the Dow Jones industrial average down 1% in the futures market:

Bitcoin’s moving lower too, down over 7% in the last 24 hours at around $33,200 - still a six-month low.

The Stoxx 600 index of European company shares has now dropped by 2.8%, to its lowest level since November 30th.

Updated

The FTSE 100 index has now lost all its gains so far this year.

It’s down 123 points, or 1.65%, at 7370 points, still on track for its worst day in eight weeks.

Russian steelmaker Evraz is now among the big fallers, down 7.1%, just behind tech-focused investment trust Scottish Mortgage (-7.5%) which continues to be pummelled by the correction in technology stocks.

Basic materials producers are weaker too, including copper producer Antofagasta (-5.8%) and Glencore (-5.3%). Educational publisher Pearson (-6.5%), gambling group Entain (-6.3%) and airline group IAG (-5.6%) are also high in the fallers.

The US stock market is on track to open lower, led by further losses on the tech-focused Nasdaq:

Gas prices jump

Gas prices have jumped sharply today, on concerns that Russian supplies to Europe could be disrupted.

The wholesale day-ahead contract for UK gas has risen 14% to 217p per therm, adding to gains on Thursday and Friday.

That’s more than triple the price a year ago, but still below its record highs last autumn:

The day-ahead UK gas price over the last year
The day-ahead UK gas price over the last year Photograph: Refinitiv

The UK wholesale weekend gas price has risen 9.7%, while the winter 2022 gas contract is 21% higher.

European benchmark gas prices have also jumped today, with the February and March contracts both up over 6%.

1.20pm GMT update: the Dutch wholesale gas contract for February is now up 18.5% today.

Russian energy supplies are in the spotlight as the United States and Europe both promised to impose new, much harsher sanctions on Moscow should it invade Ukraine.

But the Kremlin has insisted that it is reliable energy supplier, as Reuters reports:

Russia has been a reliable energy supplier to Europe even at difficult times in relations, Kremlin spokesman Dmitry Peskov said on Monday, calling reports in British media that Moscow may cut supplies in case of sanctions “fake hysteria”.

Europe relies on Russia for around 35% of its gas and is also a major consumer of Russian oil coming both via pipelines and sea ports

“In the most uneasy times in our relations, Russia was a reliable guarantor of Europe’s energy security, faultlessly fulfilling its contractual obligations,” Peskov told a conference call on Monday.

More here: Kremlin says Russia is a reliable energy supplier for Europe

Updated

Today’s losses follow the worst week for global equity markets since October 2020.

The MSCI’s index of world markets dropped by 4.25% last week, with volatility rising amid a growing sense of investor unease.

Worries about tighter US Federal Reserve policy, the tensions between Russia and Ukraine, and disappointing earnings calls from some high-profile companies are all factors, says Mark Haefele, chief investment officer at UBS Global Wealth Management:

“With a number of critical market factors still in flux, the short-term market direction can remain volatile.

But for longer-term investors, we don’t think it is a bad thing if market volatility takes some of the air out of the more speculative corners of the market—Bitcoin is down 23.8% year-to-date. Nor is it a bad thing if current volatility means that some secular growth names are being offered at their best prices in months.

Meanwhile, it’s important to remember we remain in a very strong economic growth environment, which should stay supportive of cyclical and value sectors in the short term.”

European selloff gathers speed as Ukraine worries rise

The selloff in Europe’s stock markets is gathering pace, as tensions over Ukraine rise.

The UK’s FTSE 100 index of blue-chip shares has now dropped by 93 points, or 1.25%, to 7400 points.

That’s its lowest level since the start of January, as a risk-off mood sweeps markets after Nato said it is reinforcing its eastern borders with land, sea and air forces.

European markets have fallen deeper into the red, with Germany’s DAX and France’s CAC both down 1.9% today.

It puts European stocks on track for their worst day in two months (since the discovery of Omicron sparked a selloff in November).

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:

“The threat of conflict breaking out on the doorstep is hanging over European indices, as hopes begin to fade that there will be fresh meaningful moves from diplomats.

The tech sector jitters are continuing, unsurprising given the seemingly unstoppable slide of the Nasdaq composite and the march downwards of the S&P 500 on Friday.”

Investors are also worried that the US Federal Reserve could tighten monetary policy sharply this year, after America’s inflation rate hit a 40-year high.

The Fed meets this week, and could signal that it will lift interest rates in March. Some are wondering if the Fed could hike rates by 50-basis points [0.5%] in March, rather than the 0.25bp rise expected.

Raffi Boyadjian, lead investment analyst at XM, warns there could be more jitters ahead:

Wall Street just had its most bruising week since the onset of the pandemic in March 2020 and it could get even rockier for stocks in the coming days. The Federal Reserve is poised to give a formal nod to liftoff on Wednesday and the earnings season is about to heat up with a host of major names set to report this week.

Meanwhile, tensions between the West and Russia over Ukraine show no sign of easing, adding to the market angst as a conflict could potentially deepen the global energy crisis.

Housebuilders are among the top fallers in London, such as Barratt Development (-6.6%) and Persimmon (-5.8%). Analysts at Jefferies cut their rating on some building firms this morning, as the government demands the sector foots the bill for removing dangerous cladding.

Technology-focused investment trust Scottish Mortgage has dropped 5.8% today, as tech stocks continue to come under pressure (the Nasdaq fell into a correction last week).

Updated

Bitcoin hits six-month low amid crypto turmoil

Bitcoin has tumbled to its lowest level since last July, as traders ditch risky assets such as crypto currencies.

Bitcoin has fallen to around $33,800, down over 5% in the last 24 hours.

It’s now shed more than half its value since hitting record highs around $69,000 in November.

Bitcoin over the last two years
Bitcoin over the last two years Photograph: Refinitiv

Victoria Scholar, head of investment at interactive investor, says the crypto market is “in turmoil”, and there could be further falls ahead.

It looks as though the [Bitcoin] downtrend remains intact with the potential for further downside towards $30,000 as the next major round number support level, which coincides with the summer trough.

Similarly, ether has shed around 50% with $2000 as the next key level to watch. It looks like the bubble has burst as panic selling grips the market.

What this episode has taught us is that this is still a very nascent asset class with a high level of correlation between individual crypto assets, particularly on the way down. It has also taught us that for those willing to enjoy the ride higher, traders need to be able to stomach the sharp volatility and steep declines as well. Brave traders might use this major repricing as an opportunity to buy the dip.”

The tumble in crypto prices in recent weeks as wiped $1trn off the combined value of the sector since November’s peak.

Anxiety that US interest rates could be hiked several times this year is one factor hurting speculative assets. The Ukraine crisis is another.

Chris Weston of brokerage Pepperstone says macro forces, such as “higher US real rates, lower inflation expectations and a focus on reduced liquidity from the Fed” are hitting the crypto sector.

Full story: UK business growth hits 11-month low as Omicron chills service sector

The UK economy grew at its slowest pace in almost a year in January as hospitality, leisure and travel businesses felt the impact of the Omicron variant, our economics editor Larry Elliott writes.

The monthly flash PMI (purchasing managers’ index) estimate of activity from IHS Markit and the Chartered Institute of Procurement and Supply reported a two-speed recovery with an easing of supply-chain bottlenecks for manufacturing offset by weakness in consumer-facing service companies.

Service sector growth eased for a third month, according to the survey, amid reports from businesses of a loss of momentum caused by pandemic disruptions and very subdued demand.

Amid widespread reports of severe cost pressures, the IHS Markit/Cips measure of output fell from 53.6 to 53.4 in January – its lowest level in 11 months. Any finding above 50 denotes that the economy is expanding rather than contracting.

Chris Williamson, IHS Markit’s chief business economist, said:

“A resilient rate of economic growth in the UK during January masks wide variations across different sectors.

Consumer-facing businesses have been hit hard by Omicron and manufacturers have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.”

Here’s our news story on banknote printer De La Rue’s profit warning, after the firm suffered from higher Covid-19 costs including staff absences and computer chip shortage:

Swiss franc hits six-year high against euro, in move to safe-havens

The Swiss franc has risen to its highest level against the euro in over six years, as worries over the Ukraine crisis helped to push investors into safe-haven assets.

The franc strengthened to €1.0325, its highest level against the single currency since June 29, 2015, as markets grow more jittery this morning.

Reuters has the details:

Concerns about the security situation on Ukraine’s border with Russia as well as the possibility of a snap election in Italy were driving investors’ demand for the franc, analysts said.

“Given that the Japanese yen is also up, and to some extent gold, it points to an increase in safe-haven demand,” said Maxime Botteron, an economist at Credit Suisse.

“It clearly seems that we have another risk-off move today – mainly in equity markets but that spills over to FX [foreign exchange],” said Karsten Junius, an economist at J.Safra Sarasin.

“Additionally, I can fully understand that some investors are getting more nervous about the developments in Ukraine which is then leading to a stronger CHF [Swiss franc] as well.”

This month’s PMI surveys have also shown that Omicron knocked the recovery in Japan and Australia:

UK economy slowed by Omicron: what the experts say

The fall in the UK composite PMI this month shows that omicron continued to hit growth, economists say.

But the impact could be modest, as Covid-19 cases fall and restrictions are relaxed.

That means interest rates are likely to rise next week, from 0.25% to 0.5%.

Adam Hoyes, assistant economist at Capital Economics, says the “Omicron hangover won’t last long”, with signs that supply shortages are easing.

All told, this PMI survey suggests that the economy is suffering a hangover from the surge in Omicron cases. Even so, we still think GDP will recovery fairly swiftly over the rest of Q1.

And the further rise in the price balances supports our forecast for CPI inflation to climb higher in the coming months. That means that the Bank of England is likely to raise Bank Rate from 0.25% to 0.50% on 3rd February.

UK PMI
January’s UK PMI shows that service sector growth slowed this month, but factory delivery delays are easing Photograph: IHS Markit

James Smith, developed markets economist at ING, says the UK PMIs show a modest Omicron economic hit.

A more modest fall in the PMIs relative to past Covid waves hints that the cumulative hit to UK monthly GDP from Omicron will be less than 1%.

This latest survey also hints at renewed service-sector cost pressure, and that reinforces our view that the Bank of England will hike rates again in February.

Thomas Pugh, economist at RSM UK, agrees that the economic damage from Omicron has been limited, and growth probably stabilised this month.

We expect most of the output lost in December to be made up in February as the number of people self-isolating drops, workers return to offices and consumers get back to socialising in person.

Indeed, the rise in the future output balance of the composite PMI from 72.5 in December, a year long low, to 75.8, a six month high, suggests firms are gearing up for a bounce back in demand.

Price inflation "returns with a vengeance" as firms pass on costs

UK services companies were hit by expensive raw material costs, pay rises and soaring energy bills this month - leading many to lift their own prices in return.

January’s survey of purchasing managers found that inflationary pressures continued to build in the service sector. Input costs and output charges increasing at the second-fastest rate since the survey began in July 1996 (exceeded only by November 2021).

Survey respondents “overwhelmingly” said higher raw material costs, staff wages and energy bills had led to a repricing of their services, Markit says.

Duncan Brock, Group Director at CIPS, says:

“In the gloomiest month of the year what is also disappointing for the UK economy is price inflation returning with a vengeance with the second highest jump in business expenses since 1998.

Staff wages and energy price hikes made up the bulk of the extra burden and businesses will inevitably pass on these costs to consumers.

UK private sector growth slowed to 11-month low in January

The Omicron variant has dragged UK company growth to its slowest since the lockdowns nearly a year ago.

British business activity cooled to an 11-month low in January, led by a slowdown in the services sector, a closely-watched survey of UK purchasing managers from IHS Markit shows.

Customer-facing parts of the economy were, understandably, worst hit by Omicron, as the UK experienced a “two-speed recovery in January”.

The service sector slowed for the third month running, with hospitality, leisure and travel all struggling due to the restrictions which were introduced last month, and which are now being eased.

Companies across the economy reported rising backlogs of work due to staff absences, as record numbers of Covid-19 infections led to more people off ill or isolating.

But there’s good news too -- manufacturing output hit a five-month high, thanks to a “sustained turnaround in materials availability” which may show the supply chain crisis is finally easing.

Business confidence in the outlook also picked up, driving sustained solid jobs growth.

The IHS Markit/CIPS Composite PMI, which tracks activity in the economy, dipped in January to 53.4 from 53.6.

That’s the lowest in 11 months, and weaker than expected (economists forecast a rise to 55, which would have shown a pick-up). But it is higher than the eurozone’s composite PMI of 52.4 (see earlier post), suggesting the UK has started 2022 a little stronger.

Chris Williamson, chief business economist at IHS Markit, says there were wide variations across different sectors this month.

Consumer-facing businesses have been hit hard by Omicron and manufactures have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.

Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief. Many business and financial services companies have meanwhile been far less affected by Omicron, and saw business growth accelerate at the start of the year

With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting, he adds:

Updated

European markets have now dropped further, with the FTSE 100 index down 50 points, or 0.66%, at 7444 (still around a two-week low).

Germany’s DAX is down 1%, and France’s CAC is 1.3% lower, as Ukrainian tensions and worries about potential interest rate hikes in the US continue to loom.

And here’s some reaction to the eurozone flash PMI surveys, from Frederik Ducrozet of Pictet Wealth Management:

Here’s AJ Bell investment director Russ Mould on De La Rue’s profits warning:

Banknote printer De La Rue left its shareholders feeling poorer as it warned on profit thanks to supply chain issues and staff shortages associated with the Omicron variant of Covid-10.

“While it insists a turnaround plan has been delayed rather than derailed, many investors are not sticking around to find out.”

Omicron knocks eurozone growth to 11-month low

Just in: Growth across the eurozone has slowed to its lowest in nearly a year, despite signs of recovery in Germany.

The eurozone’s recovery weakened again this month, as restrictions imposed to combat the Omicron variant caused a sharp slowdown at companies in the services sector.

Tourism, travel and recreation firms were especially hard hit by a drop in spending.

Firms were also hit by rising costs, leading them to hike their own prices. But encouragingly, manufacturers reported that supply chain delays were improving.

This pulled data firm IHS Markit’s Flash Eurozone PMI Composite Output Index down to 52.4, from 53.3 in December. That’s an 11-month low, closer to the 50-point mark showing stagnation.

Eurozone PMI, January 2022

Chris Williamson, chief business economist at IHS Markit, says the overall impact of Omicron on the wider economy appears relatively muted:

Not only has the alleviating supply crunch helped factories boost production, but cost pressures in manufacturing have also moderated.

“Importantly, while the Omicron wave has dented prospects in the service sector, the impact so far looks less severe than prior waves. Meanwhile, perceived prospects have improved among manufacturers, linked to fewer supply shortages adding to the brightening outlook.

“In the meantime, however, prices for goods and services are rising at a joint-record rate as increasing wages and energy costs offset the easing in producers’ raw material prices, dashing hopes of any imminent cooling of inflationary pressures.”

Here’s the details:

  • Flash Eurozone Services PMI Activity Index fell to 51.2 (53.1 in December). 9-month low.
  • Flash Eurozone Manufacturing PMI Output Index rose to 55.8 (53.8 in December). 5-month high.
  • Flash Eurozone Manufacturing PMI rose to 59.0 (58.0 in December). 5-month high.

De La Rue isn’t alone in being buffeted by supply chain problems.

There was a 19% jump in profit warnings issued by UK listed companies in the last quarter of 2021. A record proportion cited supply chain disruption and rising costs, according to EY-Parthenon’s latest Profit Warnings report.

It found that:

  • UK listed companies issued 203 profit warnings in 2021 - down from the record-breaking 583 warnings in 2020
  • One-in-five companies in consumer-facing sectors issued a warning over the year
  • A record 44% of profit warnings issued in Q4 2021 were blamed on supply chain disruption
  • Retail, Software & Computer services and Aerospace & Defense were amongst the hardest hit FTSE sectors in 2021

Alan Hudson, EY-Parthenon partner and UK&I turnaround and restructuring strategy Leader, says :

“Sporadic growth made it a difficult year for many companies to navigate, despite healthy headline growth. By the second half of the year, an increasing number of companies were issuing profit warnings as forecasting and earnings challenges evolved and multiplied.”

The biggest driver of warnings in 2022 is likely to be the rise in inflationary pressures and its impact on disposable incomes and margins, Hudson adds:

We have already recorded profit warnings relating to rising energy prices. Labour shortages and wage increases are also beginning to feature more in company concerns, especially in logistics, hospitality and healthcare – including care homes.”

Germany’s economy is showing resilience, with the private sector returning to growth in January after a difficult December.

Service sector companies in Germany are expanding again, while manufacturing is growing at the fastest pace in five months, the latest ‘flash’ survey of purchasing managers shows.

IHS Markit says:

The goods-producing sector drove a renewed increase in new orders at the start of the year. Overall inflows of new business showed the strongest rise since last September as manufacturing order books expanded markedly and to the greatest extent for five months. There was a slightly better month of new business across the services sector as well, with demand improving somewhat after falling in each of the previous two months.

New export business received by services firms continued to fall, however, hinting that the upturn here was driven by the domestic market.

Updated

Growth across France’s private sector has hit a nine-month low.

Data firm IHS Markit reports that French economic activity is rising at a slower rate this month, due to rising Covid-19 infections and the supply chain crisis.

Although manufacturing sped up, there was a “notable easing in services growth”, which hurt the wider performance of the French economy

Inflationary pressures also intensified across France, with output prices increasing at the fastest rate on record amid a stronger rise in cost burdens, Markit adds.

Factory activity in Japan is growing at its fastest in four years this month, as output growth picked up.

However, manufacturers are still facing persistent chip shortages and rising prices, the latest survey of purchasing managers shows.

And Japan’s wider private sector slipped into contraction for the first time in four months, after a surge in Omicron variant coronavirus cases hurt customer-facing businesses in the services industry.

Unilever shares jump as activist Peltz builds stake

Shares in Unilever have jumped almost 5% this morning, after Nelson Peltz’s activist hedge fund built a stake in the consumer goods maker.

Peltz’s interest piles more pressure on Unilever to shake up its business model, as my colleague Zoe Wood explains:

The consumer goods company, best known for Dove soap, Hellmann’s mayonnaise and Marmite, has been thrown into turmoil after a £50bn tilt at GlaxoSmithKline’s consumer healthcare division caused fury among its shareholders.

On Sunday the Financial Times reported that Trian Partners, Peltz’s New York-based hedge fund, had taken a position in the UK group, adding to the problems of its embattled chief executive, Alan Jope.

Martin Deboo, an analyst at investment bank Jefferies, said the “fox would now appear to be inside the henhouse”.

“Trian has a long and successful track record of unlocking value,” said Deboo. “This has frequently centred on splits and spin-outs.

Unilever are the top FTSE 100 riser, after plunging a week ago as investors baulked at its plan to buy GSK’s consumer healthcare arm.

Unilever’s share price
Unilever’s share price Photograph: Refinitiv

European markets have opened in the red, with Germany’s DAX and France’s CAC both down around 0.3%.

The UK’s FTSE 100 is holding up slightly better, down 0.2% or 13 points.

The pan-European Stoxx 600 is now down 3% so far this year, as worries about US interest rate rises weigh on markets, while the FTSE 100 is still up 1.35% during 2022.

European stock markets, January 24 2022
European stock markets in early reading. Photograph: Refinitiv

Richard Hunter, Head of Markets at interactive investor, says January has been difficult for investors:

The earnings season so far has been a patchy affair, marked by missed earnings reports so far set against high expectations. The likes of Apple and Microsoft have the opportunity later in the week to lift spirits, while a first reading of US GDP for the December quarter could show that prior to the Omicron variant the economy was showing real signs of recovery.

In the meantime, January has been a difficult month for investors and in the year to date the Dow Jones has lost 5.7%, the S&P500 7.7% and the Nasdaq 12% with few signs of immediate respite on the table.

More broadly, the apparently worsening of relations between Russia and Ukraine has put investors on alert, as any possible attacks by Russia will have wider implications which other major powers will be unable to ignore. Whether this results in military action or strict sanctions remains to be seen, but in any event the developments are adding to general investor unease.

Updated

De La Rue shares plunge 30%

Shares in De la Rue have tumbled by 30% at the start of trading, after it warned profits will miss expectations.

They’ve dropped 45p to 105p each, the lowest since June 2020.

De La Rue’s share price over the last two years
De La Rue’s share price over the last two years Photograph: Refinitiv

Banknote printer De La Rue in profit warning over Covid impact

British banknote printer De La Rue has issued a profit warning, after suffering supply chain shortages and staff absences due to the pandemic.

De La Rue told the City that annual profit will miss market expectations, after “significant headwinds”, primarily due to the Covid-19 pandemic, become more pronounced.

Those headwinds include increased employee absences at its manufacturing facilities globally due to coronavirus infections.

De La Rue says:

The Omicron and Delta variants have caused substantially increased employee absences in our manufacturing facilities globally, which will result in lower total operational output for the full year.

It has also suffered supply chain shortages, including semiconductors, and other process raw materials, plus rising costs due to supply chain cost inflation.

De La Rue now expects to make adjusted operating profits of £36m to £40m this financial year (to March 26th), missing market expectations of £45m-47m.

This disruption will delay the results of its Turnaround Plan by 12 months, De La Rue says, rather than derailing it.

Clive Vacher, CEO, says:

“Despite the macro challenges that are delaying aspects of the Turnaround Plan, De La Rue continues to increase adjusted operating profit in both divisions year on year, and the Plan anticipates this to continue going forward. While this trading update is disappointing, it should be seen as a delay to reaching our Turnaround Plan objectives, rather than indicating that a change of direction is required.

The Company’s leadership has worked hard to mitigate many of these external effects, with the cost reduction activities we have implemented since early 2020 having a significant impact in supporting our underlying performance while we navigate these external factors. The markets in which we operate, and our position in them, remain strong, and we continue to execute substantial investment for the future.”

Updated

Introduction: markets brace for Fed meeting and Ukraine developments

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Global stock markets are starting the new week on the back foot, as investors fret about looming interest rate rises and the Ukraine crisis.

Shares have dropped in many Asia-Pacific markets, after Wall Street ended last week with more losses. The S&P 500 fell 1.9% on Friday, as January continues to be one of the worst months for stocks since the pandemic began.

Hong Kong’s Hang Seng index, and South Korea’s KOSPI, are both down 1.25% today, while India’s Sensex has lost 2%.

European stocks are expected to open lower too, as traders brace for a Federal Reserve meeting on Wednesday. The US central bank is likely to confirm it is on track to soon start raising borrowing costs and running down its balance sheet.

As Oliver Allen, a market economist at Capital Economics, puts it:

“With inflation eye-wateringly high, the Fed is on course to steadily remove the ultra-accommodative monetary policy that has been a key prop to stock prices for over a decade now.”

There is also anxiety about the situation in Ukraine, after the US government ordered the families of all American personnel at its embassy in Ukraine to leave the country amid heightened fears of a Russian invasion.

Jim Reid of Deutsche Bank says:

Geopolitics doesn’t always impact markets even if they feel very tense and fraught. However the current Russia/Ukraine situation does seem to be adding to the risk off at the moment and merits close attention.

But Wall Street could claw back some of last week’s losses, at the start of a very busy week for company earnings - including Microsoft, Apple and Tesla.

Also coming up today

Some UK workers will be returning to the office today for the first time in weeks, as the Plan B Covid-19 restrictions are rolled back.

The latest ‘flash’ PMI surveys of firms in the UK, France, Germany and the wider eurozone will be released this morning.

They could show that the UK economy picked up in January, after Omicron hit in December, as Alvin Tan of Royal Bank of Canada explains:

The economic impact of the omicron variant is likely to have been relatively mild. Data for early January already point to some degree of recovery in restaurant bookings while card spending data has also shown signs of recovery.

The recovery along with expectation of restrictions being lifted should buoy the PMI survey, and we expect the January services PMI to strengthen to 54.8.

The agenda

  • 9am GMT: Eurozone flash Purchasing Managers survey for January
  • 9.30am GMT: UK flash Purchasing Managers survey for January
  • 1.30pm GMT: Chicago Fed National Activity Index for December
  • 2.45pm GMT: US flash Purchasing Managers survey for January

Updated

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