Market Commentary 17th January 2022 from Charlie Hancock

Housebuilders sold off sharply last week, following a government announcement regarding cladding fitted to high rise buildings. The government stated that developers must contribute towards the cost of replacing unsafe cladding which has been deemed a fire hazard. The cost of the remedial work is estimated to be in the region of £4 billion. Persimmon’s share price declined by 8.77% across the week, Barratt Developments moved 7.89% lower and Taylor Wimpey fell by 10.99%.

Data released on Friday showed that the UK economy grew by more than expected in November, with Gross Domestic Product (GDP) expanding by 0.9% during the month. November’s growth means that the UK economy has now regained its pre-pandemic size. The Office for National Statistics (ONS) cited several drivers, including early Christmas shopping, a strong increase in restaurant bookings and rising construction activity.

Data released last week showed that the German economy shrank during the final quarter of 2021, with the official estimate for the contraction between 0.5% and 1%. Germany’s economy is now around 2% below its pre pandemic level, with the manufacturing sector hampered by supply chain issues and the services sector negatively impacted by coronavirus related restrictions.

The Netherlands announced that the nationwide lockdown would be partially lifted from the end of the week, with gyms and non-essential retail stores allowed to open. In contrast, Germany announced that tighter measures would be implemented for restaurants and bars.

Economic data was mixed last week, with a closely watched consumer sentiment index declining amidst concerns around inflation. New weekly jobless claims were higher than expected, although ongoing claims declined to the lowest number for nearly 50 years.

Investors continued to pay close attention to the outlook for Federal Reserve policy, with Fed Chair Jerome Powell speaking before Congress as part of his renomination hearing. Powell suggested that the central bank would not hesitate to contain inflation, with other Fed officials echoing these comments later in the week.

Sentiment on Japan appeared to be dented by the government extending a ban on non-resident foreigners entering the country due to coronavirus concerns. A monthly Bank of Japan (BoJ) report on the state of the economy was encouraging, with sentiment amongst businesses in the services sector improving. The report suggested that the manufacturing sector was less optimistic, with rising input costs having a negative impact.

Issues in the Chinese property sector continued to impact investor sentiment and make headlines in the business press. Evergrande reached agreement with onshore lenders to delay payments on some of their liabilities, with the heavily indebted property developer continuing to experience cash flow problems. Authorities in China implemented stricter coronavirus restrictions in line with their zero covid policy, including limiting tourist activity in Shanghai and suspending some incoming flights.

The likelihood of the Bank of England raising interest rates from 0.25% to 0.50% at their February policy meeting is around 80% certain according to current market expectations.

GBP / EUR – Current 1.1981 Previous 1.1964

The Pound gained 0.64% against the US Dollar and 0.14% against the Euro. Data showing better than expected economic growth in the UK appeared to contribute to bullish sentiment on Sterling.