Ffinancial markets these days are responding to any tinge of tighter monetary policy in the US, so a little drama on Thursday was on par with the course after the US Federal Reserve referred to a settlement of the huge pandemic stimulation program could start soon. The Fed will still buy assets in the fall, but perhaps not with a value of $ 120 billion. (£ 89bn) a month. Commodities fell and equities globally took a hit. The FTSE 100 index fell 1.5%.
Context is needed, of course. Footsie had risen by 25% in a straight line, more or less, since the arrival of the vaccines in November last year. Going back to the start of the pandemic, the S&P 500, the most important US index, has roughly doubled from its low point. So the odd percentage drop hardly shows up in the medium term.
But there are at least three related reasons – in addition to worrying about the Fed – to suggest that it is getting tougher for the stock markets from here. First, there is a sense of “top optimism”. The recent crop of business results on both sides of the Atlantic was generally excellent and comfortably exceeded expectations. After the refunds, however, the potential for pleasant surprises seems limited. US stock prices, driven by cheap money, are still at sky-high levels by historic measures.
Second, concerns about the spread of the Delta variant have not disappeared. Goldman Sachs economists this week cut their U.S. growth forecasts for the rest of this year, arguing that fears of the variant will continue to put pressure on the service sector. Then there is China, the other major engine of global growth. Industrial production and retail sales were well below forecasts last month, suggesting that tighter credit conditions are biting.
None of this means that Thursday’s mini “conical tantrum” will become the real deal. Investors may as well reflect that the Fed’s approach to pulling stimuli is likely to still be slow and cautious. But suddenly there are a few gaps in the easy recovery story.
Revolut flirts with payday loans
Revolut’s new “Payday” product is probably not as cruel as the echo of the terrible Wonga suggests. The idea is that workers can get their hands on a portion of their pay before their normal monthly pay day if their employer signs up to use the scheme.
Critically, the salary must have already been earned. And since Revolut is proposing a fee of £ 1.50 per. Transaction, it is not in the price development area. From the point of view of the financial app company, which is the process of applying for a UK banking license, it is a customer acquisition strategy.
But it is also a way to draw the regulator’s attention to yourself. That Financial Conduct Authority has been strong in tightening down on high costs in recent years. Although Revolut’s product does not strictly fit these descriptions, nor is it related.
The FCA’s public concerns about so-called “employer pay schemes” include the “short-term nature of the relief”, the lack of affordability checks and the risk of employees becoming addicted. It is a long list and puts Revolut’s view in context that its version is the cure for payday loans. Let’s see how customers first use the service. Life may not work so happily in practice. Legislative skepticism is still required.
Kwarteng needs to expand its sights
Kwasi Kwarteng, business secretary, has made it easy to send US private equity-backed Cobham’s $ 2.6 billion takeover bid. Ultra Electronics to the competition authorities. The move was expected because the specific national security issues are not difficult to spot. Ultra supplies key hi-tech military kits to the UK, including submarine hunting sonar and communications interception systems.
The CMA has until mid-January to report, but let’s hope Kwarteng spends the time ordering a more comprehensive study of ownership of the UK defense sector. The individual approach to appraising deals and then settling for a few “commitments” that fall away in no time has become a formula for selling the industry’s best parts to U.S. buyers.
Advent International has already sold half of Cobham to US companies after just 18 months of ownership. A similar fate – though perhaps not on the same accelerated roadmap – would likely await a merged Ultra and butt Cobham. When the offers are all in the same direction, there is a problem. Kwarteng should look at the wider picture.
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