Time to recap

Stock markets have shrugged off their anxiety over rising government bond yields, and rallied sharply as optimism over the recovery growth.

Britain’s FTSE 100 closed at a near three-week high, while European markets posted their best day in four months. Germany’s DAX surged to a new record, with banks and carmakers among the big risers.

The rally came as investors focused on the prospects for an economic revival this year, as Covid-19 vaccinations allow businesses to return to more normal conditions.

There was also relief that the US Senate has approved Joe Biden’s $1.9tn stimulus package.

The Treasury secretary, Janet Yellen, boosted sentiment, saying the package would fuel a “very strong recovery”, and dampening concerns that inflation could spiral higher.

This drove stocks higher on Wall Street too, where the Dow Jones industrial average has just hit a new record high.

Oil also jumped, hitting a 14-month high, after an attack on Saudi oil facilities. Brent crude hit $70 per barrel, before dropping back.

Earlier, the Bank of England governor, Andrew Bailey, declared there was “light at the end of the tunnel”.

There is a growing sense of economic optimism, in markets and in consumer and business confidence measures. The rate of new Covid infections is declining, and the vaccine programme is a huge achievement.

Bailey also shrugged off worries about inflationary pressures, and warned that unemployment would probably rise as the UK’s furlough scheme wraps up over the summer.

Optimism among UK services companies has hit its highest level since the pandemic began, according to the latest analysis from BDO.

Consumer confidence is at a one-year high, as vaccinations continue to rattle along, and English schools reopened today.

However, Boris Johnson has cautioned tonight that the reopening of schools will have an impact on infection rates that could affect the roadmap for lifting restrictions.

In other news:

Greensill Capital, the main financial backer of Sanjeev Gupta’s steel empire, has entered administration.

BT has denied that chairman Jan du Plessis was driven out by a boardroom rift with its chief executive.

The meal delivery company Deliveroo has confirmed plans for a stock market debut in London, as it reported a narrower annual loss following a boom in demand during the Covid-19 pandemic.

BP has told 25,000 office-based staff that they will be expected to work from home for two days a week as part of a post-pandemic shift to flexible working patterns.

Goodnight, GW.

Boom! The US’s Dow Jones industrial average has just hit a new record high.

The Dow is up 525 points, or 1.67%, at 32,021, as the prospect of a strong economic rebound pushed up hospitality companies, banks and industrial giants

Technology stocks are still lagging, though, with the Nasdaq Composite currently down 0.6% – and Apple down 2.7%.

European stock markets have posted their best day’s trading in four months.

The Europe-wide Stoxx 600 index closed 2.2% higher, its biggest daily since 9th November 2020 (the day Pfizer and BioNTech reported their Covid-19 vaccine was 90% effective, sparking a huge global rally)

Carmakers, aeronautical firms and banks were among the best-performing sectors, as investors sought out companies who should benefit from an economic rebound.

The London stock market also rallied into the close of trading, as anxiety over rising bond yields faded.

The blue-chip FTSE 100 index has closed 88 points higher at 6719, a gain of 1.34% today. The rally was led by travel and hospitality stocks and other companies which will benefit from the economy reopening.

That’s the FTSE 100’s highest closing point in nearly three weeks (since Tuesday 16th February).

Rolls-Royce ended the day as the top FTSE 100 riser, jumping by 7.3%, on optimism that demand for its jet engines will increase as travel picks up.

Housebuilder Persimmon (+5.7%), conference organiser Informa (+5.6%), engineering group Melrose (+5.6%) and hotel chain InterContinental (5.5%) were also lifted by recovery hopes.

On the smaller FTSE 250 index, cruise operator Carnival rallied by 8%.

Rupert Thompson, chief investment officer at Kingswood, points out that this rotation into ‘value’ stocks has been running since Pfizer’s vaccine trial success around four months ago:

The main story at the moment for equities is not so much the movement in global markets overall but the moves beneath the surface. Most notably, there has been a significant rotation away from growth stocks, which were the big winners last year and indeed over the last decade, into cheaper unloved value stocks.

This move continued last week with value up close to 2% compared to a fall of just under 2% for growth. Since ‘vaccine’ day last November, which provided the initial catalyst for the rotation, value has gained 18% versus 4% for growth. Echoing this trend, the financial and energy sectors have gained as much as 25% over this period vs 8% for the tech sector. Similarly, the UK has gained 14% compared with a 4% increase for China.

The rotation has been fuelled by expectations of a strong rebound in economic growth and the rise in bond yields. A cyclical rebound means less of a need to focus on companies with good secular growth prospects while higher bond yields means high long term earnings growth potential is worth rather less than it was before.

Over in Frankfurt, the German stock market index has hit a new record high, as stocks strengthen.

Michael Hewson of CMC Markets explains:

It’s been a strong start to the week for European shares, with the German DAX flying up to new record highs, led by Deutsche Bank which hit new two-year highs after announcing it would be launching a share buyback program of up to €1bn, as well as restarting its dividend program, ahead of the release of its 2020 results next month.

The US Treasury secretary, Janet Yellen, has declared that President Joe Biden’s $1.9tn coronavirus aid package will deliver a “very strong” recovery.

In an interview with MSNBC (online here), Yellen says:

This is a tremendously important package that will bring hundreds of millions of Americans the relief they need.

Yellen says the package passed by the Senate over the weekend includes:

• The money needed to vaccinate the population, to get the pandemic under control.
• The resources that schools needs to operate safely.
• Individuals earning less than $75,000, and couples earning less than $150,000, will receive cheques for $1,400 dollars to help defray the expenses incurred in the pandemic.
• A $3,000 child credit, and $3,600 for those under the age of six.
• Extra relief for families that need childcare, and rental assistance for those who face eviction.
• Food stamps for those many families who have shortages of food.
• Unemployment insurance will be extended into September.

Yellen adds:

This is a bill that will really provide Americans the relief they need to get to the other side of this pandemic, and we expect the resources here to really fuel a very strong economic recovery.

She’s anticipating that if all goes well, America could be back to full employment, where it was before the pandemic, next year.

Yellen dampened concerns that the package could drive up inflation, saying:

If it turns out to be inflationary, there are tools to deal with that, and we’ll monitor that closely.

The New York stock market has opened, and stocks are a little higher as investors anticipate an economic recovery this year.

Tech shares are lagging a little, though.

In early trading:

• Dow Jones industrial average: up 229 points or 0.7% at 31,726 points
• S&P 500: up 18 points or 0.5% at 3,860
• Nasdaq Composite: up 36 points or 0.3% at 12,956

On the Dow, Walt Disney (+3.8%) and Boeing (+2.3%) are the top risers, while Apple (-1.5%) and Microsoft (-0.4%) are down a little.

Marios Hadjikyriacos, analyst at XM, explains how economic optimism is moving the markets.

Global markets continue to dance to the tune of rising bond yields, as a swift vaccination campaign and the overload of federal spending that is arriving soon have seen investors bring forward the timeline of Fed rate increases. The US labor market is healing quickly, President Biden’s gargantuan relief package has been approved by the Senate, and America has stepped up its immunization game, administering a record number of vaccines this weekend.

Nonfarm payrolls clocked in at 379k in February, more than double compared to the forecast of 182k, pushing the unemployment rate slightly lower. This is rather impressive considering that the report reflects a period before the vaccination program was firing on all cylinders and before the spending barrage from Congress was unleashed properly. Hence, even better days might lie ahead.

Encouraging economic news is not always good for financial markets though, as an improving outlook implies that the Fed might take the cheap-money punch bowl away sooner. The Fed has promised to run the economy hot this time, but if the trillions in spending deliver an unprecedented economic boom that lasts, normalizing rates could become appropriate before very long.

This is what the bond market seems to be pricing in. The yield on 10-year Treasuries is trading above 1.6% this week, with the first Fed rate increase being priced in for late 2022/early 2023. This has tremendous implications for currencies and equities.

Here’s our economics editor, Larry Elliott, on Andrew Bailey’s speech today:

The UK can see light at the end of the Covid-19 tunnel but the economy will never fully return to its pre-pandemic pattern, the governor of the Bank of England has said.

Speaking at an event organised by the Resolution Foundation thinktank, Andrew Bailey said the shifts in spending and working patterns seen since the country first went into lockdown measures a year ago would prove permanent.

The governor said the economy had been through a “traumatic experience” but predicted the scarring caused by the deepest recession in 300 years would be less than that caused by the decline of heavy industry in the 1980s and early 1990s.

Bailey said the UK needed to increase investment in order to limit the long-term damage but said the Bank would be cutting its forecast for the peak in unemployment after the decision to extend the furlough scheme until the end of September.

Pearson is to slash office space in a shift to more permanent home working, as the education company reported a slump in operating profits and revenues as schools shut and exams were cancelled last year.

Nevertheless, the company’s shares jumped 5% in early trading, making it the top rise in the FTSE100, as new chief executive Andy Bird unveiled a restructure that will see Pearson transition to a digitally-led, consumer-focused model.

The ex-Disney executive, whose golden hello remuneration package immediately sparked a shareholder revolt at its annual meeting last September, said Pearson delivered a solid financial performance in the face of the pandemic.

Total revenues slumped 12% to £3.4bn and operating profits almost halved, from £581m to £313m, as its traditional assessment and education businesses struggled. However, the shift to home-based education provided an 18% to its global online learning business, which saw revenues climb from £586m to £697m, which the company said its new restructure into five operational divisions would aim to capitalise on.

The company said:

“The resulting strategy, based on a simpler, more agile operating model, is focused on three global market opportunities.

“The rise in online and digital learning tools, the workforce skills gap and the growing demand for accreditation and certification.”

The company, which said the organisational restructure will cost between £40m and £70m this year, reported a healthy 52% rise in pre-tax profits thanks to the proceeds of the sale of its remaining stake in book publisher Penguin Random House to Bertelsmann.

Pearson, which employs more than 20,000 staff globally, has become the latest major corporate to announce that it is to drastically reduce its office space to adapt to the post-Covid working environment.

The company said that its plans will result in it occupying “significantly smaller square footage”, a plan that will cost it £140m this year. The company intends to keep its headquarters at 80 Strand in London, and has already said that it is scrapping its office in High Holborn, although no further details of the plans have been made public.

Pearson added:

“As we change the way we work we will simplify our property portfolio and occupy a significantly smaller square footage which will be fully technology enabled supporting collaboration and creativity.”

That chimes neatly with Andrew Bailey’s comments about how the economy won’t return to its pre-Covid state.

The governor of the Bank of England, Andrew Bailey, says there is a ‘growing sense’ of economic optimism building, but also cautioned that life won’t return to pre-Covid normality.

Speaking at a Resolution Foundation event, Bailey explains that Covid has been a shock to both demand and supply in the economy - and some of the structural changes in the last year will not reverse.

Bailey says:

Using an output gap measure on its own fails to capture the importance of this story. The best we can say is that how the output gap develops in the recovery from Covid will depend on the net effect of the two, both of which will need to move by more than in normal recoveries. There is another element to this part of the story which is hard to assess at present, namely to what extent the more structural changes we have seen during the Covid crisis will persist, and what effect they will have on the recovery?

There is a lot of uncertainty around these elements, but my best guess is that we will see some persistence, not full persistence but not a full reversion to pre-Covid either.

We will work more from home than we used to and shop more on-line because new habits will persist to some degree, and to the extent they unwind it will be over a period of time.

Encouragingly, Bailey predicts that the longer-term negative economic effects of the Covid shock will be smaller than suffered in the 1980s and 1990s recessions.

It seems likely that task and job reallocation and capital redeployment has increased since then, for instance because workers will need less significant retraining to move between sectors.

But Bailey also strikes a ‘note of realism’, despite the growing optimism about a recovery this year.

There is a growing sense of economic optimism, in markets and in consumer and business confidence measures. The rate of new Covid infections is declining, and the vaccine programme is a huge achievement. There is light at the end of the tunnel. A note of realism though: our latest forecast in essence painted a picture of an economy that starts at a lower level of activity as a result of the current restrictions and people’s natural caution associated with the renewed onset of Covid, which then gets back to where it was pre-Covid by the early part of next year.

The level of activity in a year’s time is broadly similar in the February forecast as it was in our November forecast, although the recovery is faster because the starting point is lower. There is good news in that projection, with a rapid recovery later this year, and inflation returning to around our 2% target. That recovery is assisted by the continued support the MPC is providing through low interest rates and quantitative easing, and in my view it amply justifies our current stance on monetary policy.

You can watch the event online here.

As flagged in the introduction, British consumer confidence has risen to its highest level since the coronavirus pandemic started, according to polling firm YouGov.

YouGov says its consumer confidence score increased by two points to 105.4, driven by expectations for business activity, house prices and household finances over the next year.

The oil price has hit a new 14-month high after Saudi Arabia reported that its oil facilities had been targeted by missiles and drones on Sunday.

Brent crude, the international benchmark, jumped as high as $71 per barrel, its highest level since January 2020.

Oil rallied after Saudi Arabia’s ministry of energy reported that a drone had struck a Saudi oil port, and that a ballistic missile had targeted facilities of energy giant Aramco.

Reuters has more details:

Yemen’s Houthi forces fired drones and missiles at the heart of Saudi Arabia’s oil industry on Sunday, including a Saudi Aramco facility at Ras Tanura vital to petroleum exports, in what Riyadh called a failed assault on global energy security.

The Saudi energy ministry said there were no casualties or loss of property from the attacks. The defence ministry said it intercepted an armed drone coming from the sea prior to hitting its target at an oil storage yard at Ras Tanura, site of a refinery and the world’s biggest offshore oil loading facility.

Shrapnel from a ballistic missile fell near a residential compound in Dhahran used by state-controlled Saudi Aramco, the world’s biggest oil company, the ministries said.

Crude prices have already been rising in recent months, lifted by the prospect of higher demand as the world economy reopens. Last week, the Opec+ group decided to maintain their current production curbs, which gave crude another lift.

Stephen Innes, chief global markets strategist at axi, says the possibility of supply disruption has pushed oil higher.

Oil prices have spiked higher this morning after Iran-backed Houthi rebels unleashed a coordinated attack on Saudi Arabia oil facilities and military bases.

With OPEC pursuing a tight oil policy and US Shale Oil inelastic supply response to higher prices, any disruption to the Middle East supply chain could shoot oil prices considerably higher.

European stock markets have opened higher, with travel companies among the risers in London.

Airline group IAG has gained 3%, with jet engine maker Rolls-Royce jumping 3.2%.

Cruise operator Carnival are up 5.5%, as vaccine optimism continued to lift the holiday sector.

• FTSE 100: up 38 points or 0.6% at 6667 points
• German DAX: up 74 points or 0.5% at 13,994 points
• French CAC: up 29 points or 0.5% at 5,812 points

But traders may still be anxious about the prospect of rising inflation, forcing central bankers to tighten monetary policy.

Richard Hunter, head of Markets at interactive investor, explains:

“Improving news for the much anticipated global economic recovery is being tempered by accelerating inflation concerns.

In the US, the non-farm payrolls figure which saw 379000 jobs being added in February was significantly higher than expected, with the unemployment rate also dropping to 6.2%.

Over the weekend, the proposed $1.9 trillion fiscal stimulus package was approved by the Senate, while the rollout of vaccinations also continues apace. These combined factors point to the likelihood of strong growth momentum to come later in the year.

This in turn leads to the spectre of inflation and rising interest rates, although timing remains uncertain. The Federal Reserve maintains that neither inflation nor employment rates are near levels which would require intervention, whereas investors are looking to anticipate a tightening of monetary conditions which have propelled growth over recent times.

Britain’s events industry is preparing for a post-lockdown surge in demand, as people try to catch up on weddings and look to celebrate the end of Covid-19 restrictions.

But with some suppliers having collapsed during the last 12 months, the law of supply and demand means prices are going to jump.

My colleague Mark Sweeney explains:

The UK is in store for an unprecedented boom in events as the industry prepares to stage hundreds of thousands of weddings and “end of Covid” celebrations when restrictions on gatherings are lifted this summer – just expect to pay 25% more than before the pandemic.

Booking for events have risen 250% compared with pre-Covid levels, after Boris Johnson announced a “cautious but irreversible” roadmap out of lockdown. The plans include a removal of all legal limits on mixing from 21 June, with large events permitted.

Enquiries about private parties, including a glut of “end of Covid” celebrations, are up 630% and there are estimated to be more than 600,000 couples jockeying to fit in their weddings by the end of next year. The rush has seen planning times shrink from the usual average of 500 days to about 140 days as the public seek to squeeze in their chosen event as soon as the restrictions are lifted.

“It feels like the start of the ‘roaring 20s’ all over again,” says Hugo Campbell, the co-founder of event booking site Feast It. “If the roadmap works out it is the start of what is going to be a number of boom years for events, people are going for it, they want to get out and make up for lost time.”

Here’s the full story:

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
After an extremely tough 12 months, Britain’s services companies are feeling more optimistic about their future prospects, thanks to the UK’s rapid Covid-19 vaccination programme. Service sector confidence jumped in February to its highest level since the pandemic began, according to the latest Business Trends report from accountancy and business advisory firm BDO LLP.
BDO’s Services Optimism Index rose to 94.13 in February from 86.60 in January, back towards the long-term average of 100.

That’s the highest reading in 12 months for the survey, which covers a range of industries from retail and hospitality to professional services. Overall, services is around three-quarters of the economy.
BDO’s report suggests that business confidence was rising even before Boris Johnson laid out the four-stage plan to reopen the UK economy, under which non-essential shops could open on April 12,

The continued success of the UK’s vaccination rollout programme led to a significant rise in services sector confidence in February, according to Kaley Crossthwaite, Partner at BDO LLP, who says:

“The speed of the vaccine rollout across the UK has given businesses a much-needed shot of relief.”

By the end of February, more than 20 million Britons have received their first coronavirus vaccine dose, boosting hopes of an economic recovery this summer.

Crossthwaite reckons the government’s latest business support packages will help too:

“With business lifelines extended in the shape of the prolonged furlough scheme, and an extra dose of support provided to hospitality via extensions in business rates relief and the VAT cut to 5%, there is reason to believe this optimism can be sustained as we gradually emerge from the depths of lockdown.”

But, factory bosses aren’t feeling as optimistic, with BDO’s Manufacturing Optimism Index dipping slightly to 83.99 in February.
BDO says that continued “Brexit border tensions” are offsetting manufacturers’ optimism over the vaccine rollout.

A separate survey from the Centre for Economic and Business Research and YouGov has also shown that household and business confidence has jumped to a one-year high. Their consumer confidence index jumped to 105.4 last month, up from 103.4.

The Times has the details:

“The latest rise in the consumer confidence index underlines the resilience of households throughout this third national lockdown,” Kay Neufeld, head of forecasting at the Centre for Economics and Business Research, said.

“With a road map for the gradual reopening of the economy now published, we expect the positive consumer sentiment to further aid in the recovery over the coming months.”

The rebound in consumer confidence was driven by greater optimism about the prospects for businesses. The sub-index for business activity rose by a record 5.4 points to 124. This fed through into greater confidence about the jobs market, with the index for job security over the coming year rising by 0.9 points to 112.2.

Also coming up today

The Bank of England governor, Andrew Bailey, will give his view on the UK’s economic outlook. He’ll be speaking at a Resolution Foundation event, which will examine the lasting impacts of the pandemic, and how monetary and macro-prudential policy can help create a strong and sustainable recovery.

New industrial production figures from Germany and Spain will show how European factories fared in January.

European stock markets are due to open sharply higher, with the FTSE 100 on track to jump almost 1%. Last week was pretty volatile, particularly on Wall Street, where tech stocks fell sharply - before strong US jobs figures triggered a late rally.

The agenda

• 7am GMT: German industrial production for January
• 8am GMT: Spanish industrial production for January
  
• 10am GMT: Bank of England governor Andrew Bailey speaks on the UK economic outlook
• 3pm GMT: US wholesale inventory figures for January