This week we finally saw the long-awaited long-term energy strategy for the UK. The government’s plans to make 95% of the UK’s energy production low carbon foresees a huge increase in offshore wind production allied to a big increase in nuclear power, including a move to small modular reactors. The plans are designed to reduce the UK’s exposure to “volatile energy sources we cannot control”, while making power cheaper and greener. The plan makes sense as Europe wakes up to its reliance on fossil fuels imported from a hostile neighbour, however, it overlooks the uncomfortable fact that Russia and its allies are major uranium producers. Out of the fossil fuel frying pan and into the uranium-powered fire.
Elsewhere we have seen bond yields rise again. This week’s news from central banks doesn’t appear too different from their previous positions and action will continue to be driven by inflation. We have also seen the Russian invasion help to turn inflation from an issue for western consumers and central banks to a much wider problem as rising food prices threaten to bring shortages and erode living standards in many parts of the world.
COMMODITIES: CENTRAL BANKS SET FOR ACTION AS FOOD PRICES RISE
Government bond yields increased again this week, as minutes from the US Federal Reserve’s monetary policy meeting revealed it is likely to start selling its huge stock of bonds next month. The Fed will sell up to $95bn a month as the central bank targets a $1tn reduction on its balance sheet over the next year. The European Central Bank’s minutes also indicated its members tilted towards a more hawkish approach. Other central banks around the world are taking steps to tackle inflation as the Bank of Canada appears likely to hikes rates by 0.5% next week and the Reserve Bank of Australia also expressed a more hawkish tone.
Energy costs have been the major contributor to inflation in the Western world but spiralling food prices potentially present a bigger problem for emerging countries. The United Nations Food Price Index showed a 34% increase in March year-to-date, the fastest increase in 14 years, as the war in Ukraine continues to cause disruptions to supply in the Black Sea region.
GLOBAL: RUSSIAN INVASION KNOCKS GLOBAL TRADE
Global trade has fallen sharply following the invasion of Ukraine. Data from the Kiel Institute in Germany reported that global trade fell 2.8% in March as sanctions on Russia and disruptions to trade routes start to have an effect. The biggest reduction is trade to and from Russia, with Russian imports falling around 10% as businesses cut ties or suspend operations in the country. Russia and Ukraine are both big commodity exporters and the drop in trade has helped push down the cost of shipping. The Baltic Dry Index, which tracks the cost of bulk marine cargo, is back to pre-invasion levels.
Although some of the disruptions to trade caused by the Covid pandemic are starting to ease, some significant headwinds to global trade remain. The slowdown in Chinese economic growth and localised Covid lockdowns are continuing to act as a drag on trade. In the UK, the disruption caused by the exit from the EU is also continuing to be felt with most firms reporting that additional costs and new customs rules continue to disrupt trade.
EQUITIES: CHIP SHORTAGE AND CHANGING DEMAND SHAPE THE CAR MARKET
The number of new cars registered in March fell to the lowest level in 24 years. March registrations are 14% lower than the same month last year as a shortage of microchips and the rising cost of living have been blamed for low sales. March is usually the busiest month for new car registrations in the UK as the new number plates are released. The shortage of cars is proving a bonus for car dealerships as, although overall sales are down, higher selling prices have helped protect profits. Shares in Lookers, Pendragon and Vertu Motors are up between 20% and 40% over the last year.
The Society of Motor Manufacturers and Traders says demand for electric vehicles is increasing quickly, with sales of zero-emission cars up almost 80% in the last 12 months. Chip shortages and changing demand are bringing major changes to global car manufacturing. This week VW Group announced it will phase out nearly 60% of its models across its range of brands as it focuses on higher profit margins at premium brands Audi and Porsche.