Bitcoin jumps 9% to touch 12-day high

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Market Spotlight: Trading Today's US Data in Gold

PCE & ISM Manufacturing Up NextLooking ahead to today’s US session, the key focus will be on the remaining tier one data of the week with US PCE and ISM manufacturing both up next. Given the hawkish shift in Fed commentary over the last week, including hawkish comments this week from several Fed members, US data will take on even greater importance as we move closer towards November. The market is looking at November as being the likely announcement date for tapering and any US data strength is likely to fuel a higher USD in the near term. On the other hand, any data misses will dilute expectations though it would likely take a strong miss to send USD meaningfully lower.On the PCE font, the market is looking for 0.2%, down from 0.3% prior, creating a low barrier for an upside surprise. On the ISM manufacturing reading then, the market is looking for 59.6 from 59.9, again creating room for an upside surprise.Where to Trade Today’s US Data?GoldThe recent sell off in gold from the 1826.71 level has seen price trading back down to around the broken bear channel top. While this area holds, there is room for a continuation higher. However, should today’s data drive USD higher, the focus will be on a break lower, targeting 1700 and 1634.74 thereafter.

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China’s energy crunch could export inflation around the globe

• SEE MORE Should investors be worried about stagflation?
• SEE MORE Coal is far from dead. What should investors do about it?

Quick reminder: don’t forget to get your ticket for the virtual MoneyWeek Wealth Summit. Early bird prices are still available, but not for long – it promises to be an extremely timely event this year, given all the upheaval we’re seeing. We’ll be asking some of the smartest financial experts around to help guide us through it all. Book here now.     

And conveniently enough, upheaval is what we’re talking about today. 

Like most of the rest of the world, China has been trying to cut down on fossil fuel usage. China is heavily dependent on coal; it accounts for about 70% of its electricity generation. 

But coal is dirty in a very visible manner – pollution and smog always causes discontent. And with China hosting the Winter Olympics early next year, the country has an added incentive to clean up its act.

So it tells you that something has gone very awry when you hear that China is now telling coal miners to dig for all they’re worth, smog be damned.

China’s U-turn on coal sums up what’s gone wrong with the recovery

China’s state-owned miners have been commanded, reports Bloomberg, “to produce coal at full capacity for the rest of the year even if they exceed annual quota limits.”

Meanwhile the price of the muckiest type of coal – lignite from Indonesia – has hit a record level, more than quadrupling in price in the past year.

This is partly because China is still refusing to buy from Australia, but also because all of the energy companies have been ordered to secure whatever supplies they need for winter. “Blackouts will not be tolerated”, apparently.

That’s sent the price of liquefied natural gas (LNG) through the roof too. As one commodities analyst tells Bloomberg: “They will bid whatever it takes to win a bidding war”.

China’s actions show that, as of now, keeping the lights on is more important than keeping the skies clear. Little wonder: factories are already being shut down by blackouts, which meant that September saw the first drop in manufacturing activity since February 2020.

So what’s gone wrong? What’s going on in China is really just an exaggerated (and really quite important) version of what’s happening everywhere else. Surging demand is meeting restricted supply, and it’s all being made worse by governments jumping the gun when it comes to ideals of decarbonisation and energy transition.

Why supply has lagged demand so badly

Every country has its own variations on this theme, depending on where they get their energy from. But the underlying issue is similar across the entire world.

On a broad economic front, post-lockdown demand from consumers has rebounded more rapidly than producers of goods and services were prepared for.

This makes sense. If you’re running a widget factory and suddenly no one can buy your widgets, it makes sense to err on the side of caution, even if it seems likely that demand will rebound when the shutdown ends. In fact, you probably have to err on the side of caution because you’ll need to conserve cash.

So it was always likely that supply would lag demand once the lockdowns started to ease off. Hence the supply chain disruption (which is also made worse by the fact that while domestic economies have opened up to a great extent, the global economy – which relies on smooth cross-border movement – has not opened up to anywhere near the same extent).

This has all been exacerbated by another factor. On the energy front, producers cut back due to lack of demand. But they have the added disincentive of everyone talking about stranded assets and “net zero” and “peak oil demand” and all the rest of it.

It’s not very tempting to invest in extra capacity to meet demand if all opinion and policy points to your products being phased out in the long run. That makes for a tricky balancing act.

So we’re dealing with some big mismatches. In some ways, the world is acting as if we transitioned to net zero in 2020 when in fact, we just switched all the lights off for a short while.

Now that we’re switching them back on, we’ve realised that a “return to normal” also means a return to normal levels of energy consumption, and right now we don’t have a substitute for the dirty fuels that we’re so desperate to stop using.

Inflation is looking less and less transitory

What does all of this mean for investors?

A slowdown in the world’s second-largest economy is not good news. If Chinese factories are switched off, it means they’re not making stuff, which means the energy supply crunch will also morph into a goods supply crunch. 

Overall, this means rising costs for companies. And that will almost certainly be passed onto consumers. But consumers aren’t going to take that sitting down either, because there’s a labour supply crunch, too. Which means they’ll be demanding higher wages. Which starts the whole merry-go-round off again. 

This is already happening. In Germany, the FT reports, “increasing numbers of German workers are demanding higher pay amid rising inflation, with some going on strike”. For example, the country’s biggest union, IG Metall, is demanding a 4.5% pay rise, plus added pension benefits, for workers at one group of companies in southern Germany. 

It’s a similar story in Australia. Capital Economics notes that “union officials’ inflation expectations have surged… A push by union officials to offset rising living costs coupled with severe labour shortages provide fertile ground for wage hikes in upcoming enterprise bargaining agreements.”

To be clear, I’m all for wage rises. A pendulum swing back to labour from capital has been overdue for some time and it’s at the heart of our political discontent. But as we’ve also pointed out on many occasions, this sort of shift would represent a huge change in the investment environment from the one most of us have lived through so far.

What does that mean for your portfolio? It means that if you haven’t given any thought to protecting your wealth from an environment of potentially weaker growth and relentlessly rising prices, then you probably need to.

The “death of the 60/40 portfolio” is one of many topics we’ll be discussing at the Wealth Summit. So book your ticket now. 

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ASX200 Slides As Evergrande Misses Interest Payments

Risk Aversion BuildsGlobal equities markets have come under fire on Friday following news that struggling Chinese property develop Evergrande failed to pay its $180 million interest payments yesterday. This marks the second of such payments to be missed this week. Evergrande has been at the heart of the risk off move in markets over recent weeks with the world’s most indebted property developer on the verge of collapsing over liquidity issues. The contagion fears have sparked widespread sell offs across global asset markets.Contagion RisksThe collapse of such a firm would have devastating effects for the Chinese and global economy alike and is creating significant investor uncertainty. As it stands, investors are trying to gauge whether the company will simply implode (worst case scenario), causing wide reaching damage for all of its creditors, undergo and orderly breakup (still damaging but to a less extent) or receive a bailout from the Chinese government (highly unlikely but would be best for markets).Eyes on ChinaThe issue creates further challenges for China at a time when the world is already beginning to question the health of the recovery there. Data this week showed that the Chinese factory sector fell back into contractionary territory in September, falling to 49.6 from 50.1 prior. The country has recently undergone disruptions caused by extreme weather episodes and regulatory issues which have impacted business activity.The situation is having a broad impact on markets as shown by the heavy declines in the ASX200 this week. The main Australian share index is taking the brunt of the news as investors fear the lessening of trade flows between Australia and China (its biggest trading partner) should Evergrande collapse. AUD and Aussie assets are often used as a proxy for trading China given the close links between the two, with current price action serving as further evidence of this.Technical ViewsASX200Following the breakdown below the long-term rising trend line, the ASX is now trading within a bearish channel. Price is currently testing the 7173.9 level though, with both MACD and RSI bearish here, the focus is on a continuation lower towards the 6899.4 level next.

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Gary Channon: the importance of allocating capital wisely

Merryn talks to Gary Channon of Phoenix Asset Management about his investment style and the balance between diversification and performance. Plus, capital allocation and the firms that get it right – and the firms that don't. 

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FOMO Friday: Pound Gets Pummelled

GBPUSD Breaks LowerAs we wrap another week (and it’s been a wild and wintery week here in London), it’s time once again to take a look at the action over the week. There’s been plenty to focus on this week, with no shortage of moves across the markets.However, the big focus heading into the weekend is all on the moves we’ve seen across the board in GBP and with USD seeing a firm rally across the week also, it seems the trade capturing the most attention this Friday is the almost 2.5% slide in GBPUSD. So, let’s take a look at what caused the move and, as ever; if you caught this trade? Well-done! If not? There’s always next week.What Caused the Move?It turned out to be the perfect storm for GBPUSD this week with a combination of downside GBP factors and upside USD factors driving the breakdown to the pair’s lowest levels since December 2020.Energy Crisis & Furlough EndingStarting on the GBP front, there has been plenty weighing on the UK currency this week. The escalating energy crisis and supply chain issues impacting the economy have exacerbated investor uncertainty towards the UK. The fuel shortage has been met this week by the UK PM ordering the army to become involved in distributing fuel as more and more petrol stations go empty and energy prices continue to rise as suppliers and distributors falter. This has come at the same time as the government’s furlough scheme comes to an end and universal credit (unemployment support) is due to be cut, raising fears over the near-term economic prospects for the UK.Hawkish Fed Comments Boost USDOn the USD side, the Dollar has been higher this week in response to a slew of hawkish comments from Fed member and safe-haven inflows. An increasing number of policymakers are now voicing their view that tapering is likely to happen soon, a sentiment echoed by Fed chair Powell this week. With this in mind, the greenback has been well bid across the week and looks set to remain in favour next week also. So, let’s take a look at the technical picture now.Technical ViewsGBPUSDThe sell off in GBPUSD has seen the market breaking down out of the contracting triangle pattern and below several key support levels. In the near term, while the market remains below the 1.3570 level, the focus is on a continued push lower towards the deeper 1.32 target, in line with bearish indicator readings.

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Inflation is still one of the biggest threats to your personal finances

Gas prices are up, oil prices are up, food prices are up. If you’ve noticed all this you aren’t alone; the Bank of England sees inflation hitting 4% by the end of the year and in a recent survey from Interactive Investor, 84% of people said they have noticed prices rising and 55% (quite rightly) view rising inflation as one of the biggest threats to their personal finances (the other 45% clearly aren’t concentrating…).

The key thing to know then is whether our current inflation is transitory or not. Central bankers insist it will be gone by next year – most economists agree. For them the supply crunches – of everything from semi-conductors to gas to workers – are merely due to post-pandemic reopening pressures. They will work their way through the system (quite quickly) and that will be that. 

They might be right – and, barring the fact that we would like to see wages rising, we mostly hope they are. However, we aren’t sure at all that they are right. And we aren’t altogether sure they are sure either – the inflation numbers have surprised on the upside just a few too many times for comfort. With monetary policy still very loose, the labour market very tight and pressure on governments to keep spending up, we wouldn’t be surprised if they kept doing so. So if you haven’t started to try to inflation-proof your portfolio you might want to do so. 

Possibly the most straightforward way to do this, says GMO’s James Montier, is to think of it not in terms of trying to track inflation (via index-linked gilts, say), but to look instead for a store of value that will preserve your purchasing power over the long term. For him, that’s equities – they aren’t a hedge against inflation as such (prices could fall), but “they are the businesses that charge prices and pay wages, so their cash flows should be real if these two elements are roughly matched, and thus they act as a store of value in the longer term”. That said, there is something better than just equities – “cheap equities”. Find these and you will effectively be getting your “inflation insurance at a discount”. 

Andrew Williams of Schroders mostly agrees: equities offer “decent protection” against inflation, he says (although anyone trying to build wealth in the 1970s will remember it as a struggle). But a far better predictor of performance than inflation levels is still starting valuations. Good news then that “valuation dispersion... that is, the gap in fundamental valuation between the most and the least highly rated shares –  remains at extreme levels”. So buy value stocks. And that cheap insurance you need? It’s very much available. In this week's magazine, we look at the UK market. And this week’s podcast is with top value investor Gary Channon (moneyweek.com/podcasts). We also look at an investment trust invested in Canada with some energy exposure and a strong income focus.

Interactive Investor has an idea for its worried clients: the Capital Gearing Trust (LSE: CGT), which we like too. This has two objectives: to preserve capital over any 12-month period and to deliver returns well in excess of inflation over the long run. Both good. Finally, Investec suggests JP Morgan Global Core Real Assets Trust (LSE: JARA). It is heavily invested in real estate, infrastructure and transportation, all of which should give some inflation protection. The yield is around 4.5% – buy now and hopefully even if inflation hits 4%, you will still be making a real yield (just).

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How to cash in on the fight against cybercrime

With more people doing more online than ever before, these are good times for cybercrime. The spread of homeworking and online shopping – trends given a huge fillip by the pandemic – mean the internet has never been a better hunting ground for data, money and weak access points in corporate networks. Cybersecurity is now a top national-security issue at the White House. It’s a perpetual war growing in size and complexity all the time. That makes it a compelling long-term investment theme.

The stakes are high. Intercepting and selling someone’s credit-card details is one thing. Forcing a fuel pipeline to shut down so that thousands can’t fill their cars is a different level of threat. Banks have been hit by fraud for years, but now policymakers are grappling more seriously with attacks in which foreign states are accessing sensitive data and bad actors anywhere can target and potentially cripple the infrastructure supporting an entire economy. Shiny fighter jets don’t do much for a country that can’t turn its lights on. The time for serious action is long overdue. Politicians have been talking about tackling cybersecurity for years, but there has been little concrete action.

A proliferating problem

Criminals looking to cash in online are in clover. It’s a long-running joke that cybercrime has already been built into a multibillion dollar industry. Using the internet to extort cash from businesses in so-called ransomware attacks (see box below for a definition), for example, is said to have reaped $18bn last year according to Emsisoft, a cybersecurity software business.

Some payments can be very high and the average ransom is around $150,000, so ransomware is a burgeoning subsector. Operations are becoming increasingly professional, with the bigger online crime syndicates even “renting out” their viruses to less technically sophisticated newcomers seeking a piece of the action.

In May this year US homeland security secretary Alejandro Mayorkas said that the number of ransomware attacks was up by 300% in 2020 compared with the previous year. US-Israeli IT security group Check Point Software, which carries out regular reviews of online safety, believes the number of ransomware attacks in the first half of this year was nearly double that in the same period of 2020. Furthermore, the crimes are becoming more elaborate. Not only is the target company hit, but its clients and suppliers, all of whom are of course connected across the internet, are also affected.

Meantime, an analysis of over 500 companies by IBM focusing on data breaches shows that the average recovery and clean-up cost after an attack has now reached $4.2m, the highest amount ever in the report’s 17-year history.

In the UK, government statistics show two in five businesses experienced cybersecurity breaches last year, alongside one in four charities. These numbers are probably understated as not all crime is reported for fear of reputational damage. The most common attacks are “phishing” (see box) and some attacks are a weekly occurrence. The government estimates that businesses are nonetheless spending too little on security monitoring, underscoring the need for action.

No wonder, then, that in August, US President Joe Biden held a meeting at the White House about bolstering cybersecurity with leaders of the country’s top technology companies, including Microsoft, Amazon and Apple. The fact that it went ahead amid the US withdrawal from Afghanistan perhaps further underlines the priority top policymakers are now attaching to fending off digital attacks, particularly when it comes to critical infrastructure.

The move follows July’s publication of a US presidential national security memorandum encouraging federal agencies to develop cyberdefence standards and targets that companies providing critical infrastructure can work towards. In doing so the US government is making increasingly clear its view that safeguarding services vital to keeping the country running is a shared responsibility. Although the guidelines are voluntary at present, the government has made clear that it could make them mandatory.

The Russian plot to breach US IT infrastructure

Making internet defences more robust became a growing policy priority for America following the discovery of a sophisticated online Russian spy plot uncovered just before President Trump left office. It became known as “SolarWinds” and was named after a software firm whose products were said to have been exploited – initially at least – by hackers who broke into a wide range of government and private computer networks, accessing emails, data and documents.

Vulnerabilities across Microsoft’s online offering of applications to users were exposed. In fact, those responsible were apparently even able to penetrate Microsoft’s own corporate network and access proprietary program and application coding. Many companies, as well as US government departments, including Homeland Security, Energy, and the Treasury, were breached.

Attacking a petrol pipeline

Since then there has been more high-profile online crime, helping to keep cybersecurity in the spotlight. Ransomware attacks in particular have been in the news. These attacks have featured victims as diverse as electronics giant Toshiba and Ireland’s Health Service.

But two stand out for their potentially destabilising national impact on day-to-day life. The first was in May, when Colonial Pipeline, which distributes petrol and other fuels, was forced to shut down after the computers controlling its pipeline were attacked. Subsequent shortages sent pump prices to multi-year highs, causing panic buying and leading to declarations of emergency in some US states. Colonial Pipeline paid a $4.4m ransom in bitcoin (of which just over half was said to have been recovered) to the alleged perpetrators, an eastern European cyber-extortion group known as DarkSide.

In another attack that occurred soon after, JBS, a Brazil-based business that supplies 20% of global meat, saw its US slaughterhouse operations shutdown for a short period, unsettling wholesale food markets and pricing. It handed over an $11m ransom, again in bitcoin. The attack is believed to have originated in Russia and the prime suspect, a group called REvil, has since reportedly vanished from the internet. The case was apparently raised in direct discussions about cybercrime between US president Joe Biden and Russia’s president Vladimir Putin in July.

Why we are so vulnerable

Far-reaching and well-organised attacks raise at least two fundamental and connected questions about modern computing networks that will dictate how defences are improved in the future. The first centres on how willingly companies seem to put trust in their IT partners, even though these third parties can in fact be the weak link that opens the door to a direct attack.

And secondly, how can we ever secure the modern computing structure, given that it has come to rely on so many diverse third-party IT companies, both big and small, being freely able to access hugely important networks? Criminals can operate remotely from around the world whenever they like under the cover of all sorts of apparently legitimate activities, such as boosting performance, updating programs and, ironically, patching-up security weaknesses.

Presidential intervention should engender a more co-ordinated response and prompt companies behind the curve to put the issue at the top of their own agendas. Cybersecurity businesses that can help should be their first ports of call. But companies themselves have not been idle. The cybersecurity sector has benefited even if it is not yet fully recognised as a potential investment hotspot.

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Stephen Connolly writes on markets and finance, and has worked in investment banking and asset management for nearly 30 years (sc@plainmoney.co.uk).

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The legacy of Angela Merkel

How will she be remembered?

For all the justified criticism of Angela Merkel’s tenure as chancellor – that she is a master of getting through crises without ever quite resolving them – she will be remembered chiefly as a steadying influence in an age of turbulence. There is a reason, says Oliver Moody in The Sunday Times, why Merkel leaves office with a sky-high approval rating of “an almost hagiographic 64%”. That is the sense of authentic, calm reassurance and solidity that she embodies and projects.

Those who don’t understand her lasting popularity forget Germany’s punishing history: a century and a half of “unification, imperial hubris, military defeat, hyperinflation, Nazism, division and reunification”. Germans now value “peace, stability, prosperity, solid government and incremental change”. And as the chancellor who has governed for 16 years – more than half the period since reunification in 1990 – Merkel has given them just that.

But what has she actually achieved?

In terms of major legislation, there’s oddly little to show for 16 years in office. Highlights include the introduction of the minimum wage, the abolition of national service, strict social-media laws, the phasing out of the coal industry 17 years from now, and gay marriage. The latter was initially opposed by Merkel, but she changed her mind in a typical piece of what German pundits call “asymmetric demobilisation”, says Jan-Werner Müller in The Guardian.

Roughly akin to Clintonian “triangulation”, this phrase means seizing the centre ground and “making sure supporters of other parties do not bother to vote, because they have been lulled into a sense that ‘Mutti’ [as Merkel is known in Germany] has taken care of everything already”. Indeed, many of the legislative highlights were passed at the instigation of her (mostly centre-left) coalition partners.

So she’s been lucky?

Many economists think so – in that the bedrock of Germany’s economic success since 2005 has been the “Agenda 2010” labour-market and welfare reforms introduced under Chancellor Gerhard Schröder of the SPD-Green governments of 1998-2005. Schröder’s unpopular reforms “cost him his job but paved the way for a decade of robust growth”, says The Times – letting Germany bounce back rapidly from the global financial crisis and re-emerge as the economic powerhouse of Europe.

Under Merkel, Germany’s economic success was “more luck than policy”, Marcel Fratzscher, of the German Institute for Economic Research, told The Economist. In addition to the Schröder-era reforms, which helped keep unemployment down, China’s accession to the World Trade Organisation in 2001 “opened a vast market for mighty German exporters”.

Then the EU’s eastward expansion in 2004 “created a pool of cheap labour and extended supply chains, and a source of skilled, working-age immigrants”. Meanwhile, in terms of foreign relations, “American power has held the peace that was a condition for German trading success”, and “transatlantic spats over nugatory German defence spending have had few serious consequences”.

Did she make the right calls?

Merkel has been a crisis chancellor whose most consequential decisions were thrust upon her – and who took the right decisions when needed, says the Financial Times. She kept Greece inside the euro; endorsed measures by the European Central Bank to keep the single currency together; allowed in more than a million Syrian and other refugees during the 2015-2016 migrant crisis; and supported a pandemic EU recovery fund financed by common borrowing.

But where Merkel fell short was in the “incremental business of keeping Germany up with the times”. She hands over a country marked by “digital backwardness; a creaking education system; ineffective, overlapping layers of government; and a lack of ambition for decarbonising Europe’s industrial powerhouse”.

There is also a looming pensions crisis, a swelling low-wage sector, growing income inequality, child poverty, and a misjudged energy policy resulting in the highest electricity bills in the EU. 

What was her biggest mistake?

Chief among them was the overhasty decision to shutter Germany’s nuclear power industry in 2011 in the wake of Fukushima, says James Hawes on UnHerd. The need to replace nuclear has kept Germany overly reliant on “filthy brown coal” power stations, and the Nord Stream gas pipeline fuelling German industry directly from Russia. “As a result, Germany is incredibly vulnerable to energy blackmail from Moscow, Putin’s regime has been mightily succoured, and the average German citizen now produces getting on for twice as much atmospheric carbon as the average Frenchman or Brit.” 

What about foreign policy?

Under Merkel, Europe’s largest economy assumed, however unwillingly, an ever greater leadership role within Europe, while mostly fending off French efforts meaningfully to deepen the EU. She grappled with the strains of a more isolationist US ally under Donald Trump, and tried to keep out of Brexit.

A crucial challenge she flunked, says Yascha Mounk in The Atlantic, was the rise of authoritarian populists in Europe. When Viktor Orbán was first elected, the EU could have imposed real sanctions on Hungary to halt the country’s slide into autocracy. Instead, Merkel opposed meaningful steps to hold Orbán accountable and let his party remain a member of the main centre-right (EPP) group in the European Parliament.

In short, Merkel’s legacy must be regarded as mixed at best. She oversaw Germany’s rise to “undoubted pre-eminence in Europe, yet leaves the country’s partners across the world crying out for stronger German leadership”, says The Times. “Sadly there is little sign that whoever succeeds her will provide it”.  

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British stocks are due a bounce

“It is a truth universally acknowledged that equities will always go up in the long run,” says Philip Coggan in the Financial Times. Yet the FTSE 100 has gone virtually nowhere since 2000. Even when you count reinvested dividends, the annualised total return of 3.3% in the 20 years to the end of last year is underwhelming. 

True, the dotcom bubble was at its height around the turn of the millennium. But US indices, which also experienced that boom, are up roughly threefold since then. The UK index lacks the kind of exciting tech companies that have set the world on fire over the last two decades.  

Still, America’s tech-heavy-index can’t outperform forever, says Russ Mould of AJ Bell. If we are heading for higher inflation, then “history suggests that you want to own real assets, or shares in them – commodities, miners, oils and property… the UK marketis ideal”. 

British shares are also far cheaper than their US counterparts. Trading on a cyclically adjusted price/earnings (Cape) ratio of 15.2 as of the start of the current quarter, the UK market is on a discount not only to most developed markets, but also to emerging ones such as Thailand and Brazil. The US is more than twice as pricey on the Cape measure. After two decades of disappointment, the FTSE could be heading for happier years ahead.

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The taper tantrum begins

• SEE MORE Too embarrassed to ask: what is tapering?

“The stockmarket seems to... be having its ‘taper tantrum’,” say Jacob Sonenshine and Jack Denton in Barron’s. Last week the US Federal Reserve signalled that it could be ready to start reducing (or “tapering”) the amount of emergency support it gives the US economy before the end of the year. It is currently buying $120bn-worth of US government bonds and mortgage-backed securities (MBS) with printed money every month. A reduction in central-bank stimulus is bad for stock and bond prices, but markets had so far shrugged off the prospect of monetary tightening.  

Yet on Tuesday the S&P 500 fell 2%, its worst day since May, as bond yields (which move inversely to prices) rose. The benchmark US 10-year Treasury bond yield has gone above 1.5% for the first time since June. Higher bond yields prompt investors to buy bonds and ditch stocks.  

Barring serious economic turmoil, the Fed is now expected to announce tapering in November, says Justin Lahart in The Wall Street Journal. It looks poised gradually to reduce the pace of monthly asset purchases until they hit zero sometime in the middle of 2022. That could open the way for interest-rate rises before the end of next year.

On this side of the Atlantic, the Bank of England is also moving closer to raising interest rates, says Paul Dales of Capital Economics. The Bank left rates unchanged at 0.1% and the quantitative easing (QE) target at £895bn during its September meeting. Yet the minutes noted that the case for some “modest tightening in monetary policy” had “strengthened” since its last meeting. The Bank appears to be more worried that inflation will stay stuck above the 2% target (which necessitates earlier interest-rate hikes) than that the economic recovery is losing steam (which would require policy to stay looser for longer).

The Bank seems to have taken a slightly “hawkish” turn, agree Sanjay Raja and Panos Giannopoulos of Deutsche Bank. Policymakers are just waiting to see what effect the end of furlough has on the job market before acting on inflation. The analysts now expect the bank to raise rates to 0.25% in February 2022, with a further rate hike in November next year to 0.5%. This week the Bank’s governor, Andrew Bailey, indicated that the Bank might even hike rates before the current QE programme finishes at the end of this year.  

The Bank of England owns more than a third of UK public debt because of quantitative easing, says Jeremy Warner in The Daily Telegraph. Easy money has saved “the Exchequer billions in debt servicing costs”. Yet growing inflationary pressure could force it to “jack up interest rates”, which will cost the Treasury billions. The health of the public finances is “a matter of growing concern”.

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China comes close to banning cryptocurrencies

Chinese regulators have moved one step closer to banning cryptocurrencies. On 24  September the People’s Bank of China (PBOC), the central bank, announced that “virtual currency-related business activities are illegal financial activities”. The bank blames cryptocurrency speculation for “breeding illegal and criminal activity”.  

Beijing’s crackdown on cryptocurrencies has been going on since 2013, says Scott Nover for Quartz. Earlier this year it banned financial institutions from providing crypto-related services. That edict had sent Chinese bitcoin buyers onto overseas platforms instead. The new rules seek to close that loophole. “Crypto transactions and crypto services of all kinds are banned in China,” says Henri Arslanian of PriceWatehouseCoopers. “No room for discussion. No grey areas.” The measures don’t appear to amount to an outright ban on cryptocurrency possession, says Andrew Griffin in The Independent. But related activities are now heavily restricted. The PBOC has made clear that digital currencies are “not legal tender”. Bitcoin prices plunged by 6% on the news. But prices rebounded over the weekend, says Daren Fonda in Barron’s. Cryptocurrencies have made up the lost ground caused by the announcement. 

Trading around $42,000 early this week, bitcoin has gained 30% since the start of the year but is down by one-third since hitting an all-time high in mid-April. A ban on transactions may not tank prices because “about 70% of all circulating bitcoin [is] now held by long-term holders, up from 59% in May”. For now, crypto markets appear to think that they can do without “China or its vast market”. Yet “whether that lasts remains to be seen” as other Asian countries such as Singapore also tighten the screws.

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Gas prices explode – and oil prices will follow

• SEE MORE Why are energy prices going up so much, and what does it mean for consumers and investors?
• SEE MORE What to invest in to beat soaring energy prices

Brent crude oil prices have broken through $80 a barrel for the first time in almost three years. Oil’s rally comes as soaring European gas and coal prices presage a winter energy crisis. In September 2020 “in Europe it cost €119… to buy enough gas to heat the average home for a year”, says The Economist. “Today that figure is €738.” 

A cold European spring and a hot Asian summer, combined with a post-pandemic industrial rebound, have kept demand high. Imports of US liquefied natural gas (LNG) on ships will help ease the pressure a little, but global gas markets depend mainly on pipelines and are only “imperfectly linked”. 

Denting the global recovery

“Gas storage tanks in Europe are only 72% full ahead of the winter season, compared with the usual 87% at this time of the year”, Warren Patterson of ING tells Pierre Briançon in Barron’s. The global recovery, which was already “weakened by the Delta coronavirus variant, will take another hit”.  

The crisis may yet ebb, says Kieran Clancy of Capital Economics. A mild winter in the northern hemisphere and the long-delayed approval of Russia’s Nord Stream 2 pipeline to Germany could restore balance to the market. That said, even then prices are still likely to remain elevated until at least spring next year.  

“Hope is not a policy”, says John Kemp for Reuters. Governments are stepping in. Italy plans to spend €3bn on cushioning the blow to consumers. The trouble is that protecting householders from rising prices will only mean a bigger hit to industrial users, which could “disrupt supply chains and create shortages elsewhere in the economy… There is a limited global supply of gas [and it] must be rationed”. In Britain and elsewhere “residential and commercial customers” could do their bit by “turning down their heating this winter”.  

Extra demand for oil 

High natural-gas prices are having knock-on effects in other energy markets, says Julian Lee on Bloomberg. In Europe and Asia it is now “cheaper to burn oil than gas to generate electricity”. Oil trader Vitol Group predicts that such “fuel switching” will produce an extra “half a million barrels a day” in global oil demand this winter. The reopening of US borders to EU and British visitors also heralds a recovery in the long-haul aviation market, providing another tailwind for oil. Oil has staged a “remarkable recovery” since US prices went negative in April last year, says Matt Egan for CNN. Goldman Sachs, which has long been bullish on the fuel, now forecasts Brent crude will “hit $90 a barrel by the end of the year”. 

Europe’s energy woes are spreading worldwide, says Stephen Stapczynski on Bloomberg. Even an average northern-hemisphere winter is likely to bring further price hikes. Soaring LNG prices will mean higher prices for Chinese-made steel and aluminium. “Economies that can’t afford the fuel – such as Pakistan or Bangladesh –could simply grind to a halt”. Long focused on oil prices, traders are “likely to learn how much the global economy depends on natural gas” this winter. 

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How small businesses can reduce their energy bills

Soaring energy prices are hitting small businesses hard: a fifth are considering raising prices because of the effect of higher bills on their bottom line. 

One key problem is that small businesses are not covered by the price cap that provides a safety net in the consumer sector. As a result, if you are not currently locked into a fixed-price deal with your energy supplier, there are no constraints forcing it to keep your bills at a certain level.

Also, if you have run up a credit balance with your current supplier only for it to go bust, there is no guarantee you will recoup this loss. While Ofgem, the industry regulator, is required to ensure your contract is transferred to a new supplier, it may not be able to persuade the company taking on your account to recognise your credit. You can register as a creditor with the administrators of your old firm, but there may not be enough money in the business to pay you what you’re owed.

How, then, to reduce the effect of rising energy costs, particularly as many in the sector think the problem will get worse before it gets better?

Part of the answer lies in ensuring you’re on the best deal possible with your energy provider. Most businesses lock into deals for a set period with their supplier, but if you’re currently out of contract – or it’s coming up for renewal – consider your options carefully. 

Look for short-term deals

On the one hand, fixing your costs will give you certainty, useful for budget planning, and protect you from further price increases over the next few months. On the other, costs are already very high, so you’re arguably fixing your bills at just the wrong moment.

Given these conflicting pressures, energy-market advisers currently suggest signing up to short-term deals. Look for a contract lasting six or 12 months, so that you have room to benefit once market conditions ease. Alongside focusing on your energy supply contracts, now is also the time to prioritise energy saving. There may be all sorts of opportunities to reduce your firm’s energy consumption.

Having your company’s energy use audited could be a valuable first step. An expert adviser will help you establish where and how your business is using energy – and, more importantly, where the greatest opportunities for reducing usage are to be found. 

Your energy provider may offer audits free of charge, but if not it is worth considering paying for advice, since the potential savings are likely to outweigh the costs.

One initiative could be to reduce the amount of energy your business uses during peak hours, when charges tend to be higher. Can you stagger the working day for some staff, for example? If you run energy-hungry machinery, can you employ it during non-peak hours?

Energy efficiency can also generate savings, particularly if you focus on the cumulative gains. Programme thermostats so you’re only heating the workplace at times when staff are actually there; install sensors that turn off the lights when no-one is in a particular room; switch to energy-efficient light bulbs throughout your premises; and if you’re buying new equipment, make energy-efficiency ratings a key part of your purchasing decisions.

Finally, while all these steps will help, you will make more progress if you can get staff to take reducing energy usage seriously too. Talk to employees about why you need to get energy costs down, and keep reminding them that they can help.

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