Financial markets these days react to any whiff of tighter monetary policy in the US, so a little drama on Thursday was par for the course after the US Federal Reserve’s minutes suggested the winding-down of the huge pandemic stimulus programme could start soon. The Fed will still be buying assets in the autumn, but maybe not at the rate of $120bn (£89bn) a month. Commodities fell and shares globally took a hit. The FTSE 100 index dropped 1.5%.
Context is needed, of course. The Footsie had risen by 25% in a straight line, more or less, since the arrival of vaccines last November. If one goes back further 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 decline hardly shows up on a medium-term view.
But there are at least three related reasons – in addition to fretting over the Fed – to suggest the going gets tougher for stock markets from here. First, there’s a sense of “peak optimism”. The latest crop of corporate results on both sides of the Atlantic was generally superb, comfortably beating expectations. After the whoosh of recovery, though, the potential for pleasant surprises looks limited. Share prices in the US, fuelled by cheap money, still stand at sky-high levels by historical measures.
Second, worries about the spread of the Delta variant have not gone away. Goldman Sachs economists this week trimmed their US growth forecasts for the rest of this year, arguing that fears about the variant will continue to depress the services sector. Then there’s China, the other big engine of global growth. Industrial production and retail sales were well below forecasts last month, suggesting tighter credit conditions are biting.
None of which means that Thursday’s mini “taper tantrum” will turn into the real deal. Investors might equally reflect that the Fed’s approach to withdrawing stimulus is likely still to be slow and cautious. But there are, suddenly, a few holes in the easy recovery story.
Revolut flirts with payday loans
Revolut’s new “Payday” product probably isn’t as gruesome as the echo with the horrible Wonga suggests. The idea is that workers can get their hands on a portion of their salaries before their regular monthly payday if their employer signs up to use the scheme.
Critically, the wages must already have been earned. And, since Revolut proposes a fee of £1.50 per transaction, it is not in price-gouging territory. From the point of view of the financial app firm, which is the process of applying for a UK banking licence, it’s a customer-acquisition strategy.
But it is also a way to draw the regulator’s attention to yourself. The Financial Conduct Authority has been strong in clamping down on high-cost credit in recent years. While Revolut’s product strictly fits neither of those descriptions, nor is it unrelated.
The FCA’s public worries about so-called “employer advance salary schemes” include the “short-term nature of the relief”, the lack of affordability checks and the risk of employees becoming dependent. That’s a long list and puts into context Revolut’s pitch that its version is the cure for payday loans. Let’s see how customers use the service first. Life may not work so happily in practice. Regulatory scepticism is still required.
Kwarteng must widen his sights
Kwasi Kwarteng, the business secretary, has done the easy bit – sending US private equity-backed Cobham’s £2.6bn takeover bid for Ultra Electronics off to the Competition and Markets Authority. The move was expected because the specific national security issues aren’t hard to spot. Ultra supplies important hi-tech military kit to the UK, including submarine-hunting sonars and systems to intercept communications.
The CMA has until mid-January to report but let us hope Kwarteng uses the time to order a fuller study into ownership of the UK defence sector. The case-by-case approach to assessing deals, and then making do with a few “undertakings” that fall away in no time, has become a formula for selling the best bits of 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 – though perhaps not on the same accelerated timetable – would probably await a merged Ultra and rump Cobham. When the deals are all in the same direction, there’s a problem. Kwarteng should look at the wider picture.