HC-AM Morning Report - Welcome to 2022!

Welcome to 2022!

Monday 4th?January 2022

Good Morning,

Here are this mornings headlines:

The Start of 2022- The market has picked up where it left off, with the first few sessions of 2022 continuing the Santa Claus rally we saw heading into the holidays. The risk on theme is being driven by hopes that omicron will be manageable and that this in turn might mean a swifter resolution to other covid driven issues – supply chains, staffing, leisure, and hospitality uncertainties etc. A couple of notable stock performances were Apple, which briefly touched a market cap of $3trillion, making them more valuable than all but the four largest economies in the world! Tesla also had a stellar day, posting a 13.5% gain on the news that they beat their delivery targets for Q4 – leaving their share price up 13.5% year to date!

Commodity Markets- The risk theme continues in other markets, with commodity markets performing well and FX markets also taking a bullish tone. Sterling has been one of the major beneficiaries over the break, pulling back some of the losses we saw versus the US Dollar and making gains almost universally against other currencies. One significant loser in the FX space is, once again, the Turkish Lira which is back on its skyward trajectory after inflation numbers came out at 36%, the highest in the Erdogan era. The government had hoped to prop up the currency by offering depositors the difference between the savings rate and the inflation rate in a bid to get people to keep funds in local currency. However, with inflation so high this is going to prove a very costly exercise and there is no guarantee that the incentive will work. Therefore, the government have now said that all exporters will have to convert 25% of their revenues into local currency, which they will have to convert with the Central Bank. It will be interesting to see how long a reprieve the market gives the Lira on the news of this new decree before almost certainly sending it lower once again.

UK- Closer to home: UK businesses are going to be in for some disruption at the borders in coming weeks, as new regulations on the transport of goods come into play. The rules are a tightening of the original post-Brexit changes and are likely to slow down the transit of goods through ports as well as increasing costs and are most likely to hit the food and fresh produce industry the hardest. Despite knowing about the coming changes, a survey by the Federation of Small Businesses showed that only a quarter of respondents felt they were prepared for them and a former civil servant responsible for delivering Brexit has warned that some British businesses may just “give up importing” as a result of the changes, deciding that it’s just not worth the hassle.

US Steel Tarrifs- Another challenge for the UK comes indirectly from Europe in that they have now negotiated a reduction in US steel tariffs, which now makes UK products uncompetitive to supply to US customers. The EU-US agreement eliminates the 25% steel tariff set by Donald Trump in 2018 and gives EU manufacturers a distinct advantage (there’s also a strict clause that prohibits any steel that started life outside of the EU being exported to the US under the scheme, which means that the UK could lose out on exporting some unfinished goods to the EU too). The economic impact to the UK won’t be disastrous, but it’s another erosion of a strategically important industry and probably means a greater likelihood that the government is going to have to step in and support it at some point.

The Regional Comprehensive Economic Partnership- On the theme of trade deals: The Regional Comprehensive Economic Partnership came into force yesterday. Negotiations for this partnership started in 2012 and its subsequent ratification and now implementation will be worth paying close attention to in the coming months and years. The fifteen-member bloc accounts for some 2.2bn people, a third of the world’s GDP ($26.6tn) and now represents the largest trade bloc in the world, spanning as far south as New Zealand and as far north as China.?Broadly speaking the bloc has three aims. Firstly, to counter protectionism, secondly, boost investment and thirdly allow freer movement of goods and services across the region. Notably, one big player in the region will not be present: India. The country pulled out of the partnership negotiations in Q4 of 2019 as New Delhi was primarily concerned that RCEP would threaten the stability of the Indian economy as fears over Chinese dumping of goods and Australasian dairy products flooding the domestic dairy industry.?The fledgling bloc is far from a finished product and advocates argue that it will be conducive to further reducing tariffs and protectionism as the region’s economic activity increases. Furthermore, they argue that it will provide them with greater leverage in trade negotiations (or disputes) with the US.

China- China has partially closed Ningbo Port after a covid outbreak. The port is still operating in a limited capacity but is apparently struggling with staffing issues on top of the closure, which is further hampering goods flow. Amazingly, the number of reported cases that has caused this lockdown is just 23 and they are concentrated within one manufacturing facility in the region.

Elizabeth Holmes- Other news of note: Elizabeth Holmes, founder of fallen tech unicorn Theranos, has been found guilty on four counts of fraud and will face a lengthy prison term as a result.?Details of the verdict?can be found below whilst the book ‘Bad Blood’ is well worth getting hold of and will no doubt be going back on the bestsellers list as a result of this outcome.

Looking Ahead- This week will be one to watch, as traders get back to their desks either with a new year and new targets or facing the last quarter of their financial year and wanting to make it one that counts. Whether the latter means going all in on the current rising tide or deciding to bank what’s already been made is anyone’s guess at this stage. There is a lot on the data calendar across the week, with today having already produced UK BRC shop prices; a 0.8% rise in December driven by food price inflation. Later this morning we’ll get manufacturing PMI data and the same out of the US this afternoon.

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Happy New Year.