Downbeat mood settles in as China’s problems spread and the Fed mulls another rate hike
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘”A more downbeat mood is settling in about what lies ahead for the global economy, as China’s problems spread into the financial sector, while high inflation still lingers elsewhere. The FTSE 100 has opened on the back foot, with the Lionesses’ winning spirit proving highly elusive to capture, given the concerns unsettling investors right now.
The fight again inflation in the United States is still ongoing, with the minutes from the Federal Reserve meeting indicating that another rate hike is still on the table, which has the potential to push the US into a deeper downturn. Reaching the target rate of inflation of 2% is proving a very hard nut to crack. Policymakers only have the blunt tools of rate hikes to do it, so they risk sending splinters of pain across the wider economy.
The surprise rate cut on a key one year lending rate this week by the People’s Bank of China has failed to substantially lift spirits. Stimulus so far is considered to be far short of what’s needed, given the fresh cracks appearing across sectors from property to tech and now finance. Fresh alarm has been raised after Zhongzhi Enterprise Group, a giant wealth manager, has admitted it’s facing a liquidity crisis, after missing payments to retail investors, and will have to restructure its debt. The size of the firm is a huge cause for concern given that it’s thought to have $138 billion in assets under management, owning a trust arm which pools investments from firms and rich households to lend out. It looks likely that the trouble in the real estate market has spilt over into the business, given that it’s offered financial lifelines to struggling property businesses and bought up stakes in unfinished property projects, betting on a rebound that has not materialised.
This latest crisis is set to see confidence in China’s economy ebb away further, with investors waiting to see what else authorities can come up with to patch up problems. China’s companies need resilient consumers around the world to offset lower domestic consumption as the recovery has stumbled, but as interest rates are hiked, confidence in buying bigger ticket items is falling. Shares in China’s Lenovo Group have fallen back after it revealed it’s been hit by the continued fall in demand for PCs around the world, sending revenues down by 24%. The post pandemic slump in sales of IT equipment following the frenzied buying during Covid, shows little sign of immediate reversal.
Oil prices have edged up a little but are still markedly down on the week as investors assess the impact of China’s economic problems on demand, and the likelihood that interest rates could be hiked again or at least linger at a high level for a lot longer. As the world’s two largest economies look set to decelerate further, energy requirements ahead are uncertain, putting downwards pressure on the price of the benchmark Brent Crude which is still trading around $84 a barrel.
Burger King had been hoping the worst of its supply chain issues were behind it, after the pandemic proved to be one of the most challenging times in its history, with shortages popping up on everything from potatoes to roof tiles. But problems have reared up again, with the effects of climate change forcing a menu change in India, and tomatoes turning into a cost too high to include.
As the popular salad item has quadrupled in price, it’s been ditched from sandwiches – after McDonalds and Subway made a similar move. Monsoon rains are the culprit, which have disrupted harvests and caused a surge in the price of vegetables, which rose by 37% in the year to July. The company isn’t offering a substitute – unlike KFC which swapped lettuce for cabbage in its wraps after floods destroyed crops in Australia. It may not be a whopper of a problem for the chain, but it is just a taste of the disruption we are likely to face as unusual weather patterns persist.”