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FTSE 100 slides as 'Freedom Day' falls flat

UK economy takes a turn towards unlocking

Today was supposed to be a landmark day where the UK economy finally shook off the handbrake of Covid-19 restrictions. Instead of a story of vaccine success it has turned out to be, not only a political shambles, but a big market sell-off over concern about the effect rising hospitalisations, along with big increases in the numbers of people self-isolating will have on the recovery story.

Europe

Over the weekend the UK government did its best impression of shooting itself in the foot over its isolation policies, while Delta variant cases have been rising sharply, sparking concern that hospitalisations could rise to a level that might overwhelm the NHS.

Much has been made of the fact that UK infection rates are rising at the fastest rate in Europe, and back at levels last seen in January, however that’s likely to be because the UK is testing at a much higher rate, than was the case back in January. Only the US and India have conducted more tests, while on a 7-day rolling average, the UK is way out in front of France, who are next.

These rising virus concerns have rippled out across global markets with European markets sliding sharply, the DAX hitting a two-month low, and the FTSE 100 set to close at its lowest level in three months, with nearly all sectors in negative territory.

The main concern appears to be that rising infection rates, along with an increase in self-isolation levels, as a result of being pinged by NHS Track and Trace, could stymie the recovery that has been in place since March. A lot of hospitality venues are already having to close due to a shortage of staff who are isolating as a consequence of being pinged by the app.  

We’ve seen weakness in the usual areas of basic resources with BP and Shell lower on the back of weaker oil prices.

Travel and leisure stocks have continued to slide after the UK government put stricter restrictions on travel to and from France, while also moving the Balearic Islands onto the amber list, sending Jet2, easyJet, IAG and Ryanair shares lower, along with TUI.

Rolls-Royce shares are also lower as it becomes increasingly apparent that they will struggle to meet their estimates of achieving 55% of the flying hour levels of 2019, with the expectation of turning cash flow positive at the end of the second half of this fiscal year.

Reinsurers have taken a hit on the back of the recent flooding across Germany, Belgium and the Netherlands, with Swiss Re shares falling the most in almost three months.  

Another fire at an Ocado warehouse has seen the shares slip back, after it was announced that thousands of orders could well be affected by the interruption. Marks & Spencer, which uses Ocado has also seen its share price fall back as concerns rise about the safety of these facilities, given that this isn’t the first time a fire has taken hold and hit the company’s service levels.

The fire will be of a particular concern given how much Ocado’s business model relies on automation and any concern about the safety or otherwise of its robots, could call into question not only its domestic business, but its international business as well.

It’s been a struggle to find a silver lining today, but Just Eat Takeaway has provided it for the FTSE100, the only company whose share price has managed any significant gain.  

US

US markets have taken their cues from today’s declines in European markets, opening sharply lower as concerns about the economic prospects for the rest of this year become shrouded in uncertainty, with the S&P500 sinking below last week’s lows and below the 4,300 level, and to its lowest levels this month.  

From concerns about the reflation trade, we’ve gone full reverse ferret in the face of what is becoming rising worries that spiralling Delta cases could undermine the global recovery story, and prompt new restrictions as we head into the autumn.  

US 10-year yields have slid to five-month lows below the 1.2% level, as well as below the 200-day MA, for the first time since November last year, on concerns over a weakening economic outlook and a sharp increase in Delta variant cases in the US, as well as across the world.

We’re consequently seeing sharp declines in US travel stocks as concerns grow that a return to transatlantic travel could be further away than ever, with the likes of American Airlines, United Airlines and Delta all sliding back, while the cruise lines are also sinking with Royal Caribbean, Norwegian Cruise Lines, and Carnival all lower.  

On the IPO front Robinhood today announced that it was looking to sell 55m shares at between $38 and $42 a share, raising over $2bn in the process. Its monthly active users have more than doubled in the past 12 months, rising to 17.7m during Q1 of this year, and up to 22.5m towards the end of Q2.  

FX

The US dollar is getting a bit of a haven bid today as equity markets slide over concerns about the global economic outlook. The Canadian dollar along with the Norwegian Kroner is amongst the worst performers after the OPEC+ oil deal agreed over the weekend, saw Brent crude prices fall to one-month lows.  

The pound has slipped to its lowest levels against the US dollar since mid-April, as well as closing in on the 200-day MA for the first time since September last year, with some concerns that the reopening of the economy may well cause more problems than anticipated. The rise in cases could also be prompting some to pare back the prospect of a tightening of policy in the short to medium term if the disruptions currently being experienced across certain sections of the economy get worse.  

Commodities

Brent crude prices have hit one-month lows in the wake of the weekend agreement by OPEC+ members to agree a deal to increase output by up to 400k barrels a day on a monthly basis starting in August, and continue until production has been restored to the level it was pre-pandemic.

Concerns about the growth outlook also appear to be hitting copper prices, along with a stronger US dollar, with prices hitting a one week low on rising demand concerns in China, and globally more broadly.

Gold prices are also being held back somewhat by the stronger US dollar, although it is doing much better than other metals prices due to an element of haven demand.


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