FFinancial markets are reacting these days to any puff of monetary policy tightening in the United States, so a little drama on Thursday was to be expected after U.S. Federal Reserve minutes suggested the end of the massive stimulus program pandemic could start soon. The Fed will still buy assets in the fall, but maybe not at the rate of $ 120 billion (£ 89 billion) per month. Commodities fell and stocks globally took a hit. The FTSE 100 index fell 1.5%.
Context is necessary, of course. The Footsie had climbed 25% in a straight line, more or less, since the arrival of vaccines last November. Going back to the start of the pandemic, the S&P 500, the main US index, has roughly doubled from its low point. So the odd percentage drop barely shows on a medium-term view.
But there are at least three related reasons – besides worrying about the Fed – to suggest that things get tough for the stock markets from here. First of all, there is a feeling of “peak optimism”. The latest crop of corporate results on both sides of the Atlantic has been generally superb, far exceeding expectations. After the whoosh of the recovery, however, the potential for good surprises seems limited. Stock prices in the United States, fueled by cheap silver, are still at all-time highs according to historical measurements.
Second, concerns about the spread of the Delta variant have not gone away. Goldman Sachs economists this week cut their US growth forecast for the rest of the year, arguing that fears about the variant will continue to depress the services sector. Then there is China, the other big engine of global growth. Industrial production and retail sales were well below expectations last month, suggesting that the tightening in credit conditions is biting.
None of this means Thursday’s mini “tantrum” will turn into a real deal. Investors might also think the Fed’s approach to withdrawing stimulus is likely to remain slow and cautious. But suddenly there are a few holes in the story of easy recovery.
Revolut flirts with payday loans
Revolut’s new “Payday” product is probably not as bad as the Echo with the Horrible Wonga suggests. The idea is that workers can get their hands on part of their salary before their regular monthly salary if their employer signs up to use the program.
Above all, the salary must already have been earned. And, since Revolut offers a fee of £ 1.50 per transaction, it’s not in price gouging territory. From the perspective of the financial applications company, which is in the process of applying for a UK banking license, this is a customer acquisition strategy.
But it is also a way of drawing the regulator’s attention to you. The Financial Conduct Authority has severely cracked down on high-cost credit in recent years. While Revolut’s product does not strictly match any of these descriptions, it is also not unrelated.
FCA public concerns about so-called “employer payday advance plans” include the “short-term nature of the relief”, the lack of affordability controls, and the risk that employees become addicted. It’s a long list and puts Revolut’s argument that his version is the cure for payday loans in context. Let’s first see how customers are using the service. Life may not work so happily in practice. Regulatory skepticism is still the order of the day.
Kwarteng must broaden his horizons
Kwasi Kwarteng, the business secretary, put the spotlight by sending Cobham’s £ 2.6 billion takeover bid for Ultra Electronics to the Markets and Competition Authority. This decision was expected because specific national security issues are not difficult to spot. Ultra supplies the UK with important high-tech military equipment, including submarine hunting sonar and communications interception systems.
The CMA has until mid-January to report back, but let’s hope Kwarteng takes the opportunity to commission a more comprehensive study of British defense sector ownership. The case-by-case approach of evaluating deals and then settling for a few “commitments” that fall in no time has become a formula for selling the best things in the industry to US buyers.
Advent International has already sold half of Cobham to US companies after only 18 months of ownership. A similar fate – although perhaps not on the same accelerated timeline – would likely await a Fusion Ultra and Rump Cobham. When the agreements are all in the same direction, there is a problem. Kwarteng should look at the larger picture.