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Consumers splash the cash ahead of holidays

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This is the last Coronavirus Business Update of 2020. We will return on January 4. We wish you a healthy and happy seasonal holiday and look forward to continuing keeping you updated in the new year.

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Signs of renewed economic activity in UK and US even as infections rise

Consumers rushed out to splash the cash in shops, pubs and restaurants after November’s coronavirus lockdown ended in England, resulting in the fastest rate of consumer spending growth this year, according to the latest data tracking bank transactions.

Figures from Fable Data, based on card transactions and bank payments, show that consumer expenditure in the UK was up 9.4 per cent in the week ending December 13 compared with the same period a year ago.

Line chart of annual consumer spending change (%) showing a sharp rise in UK consumer spending after England’s November lockdown ended

Even as coronavirus infections intensified across Europe and the US, there were broader signs of renewed economic activity towards the end of the year in a number of countries.

Sales of British Christmas trees were up 15 per cent, reflecting the mixture of a traumatic mink cull in Denmark that affected supply chains and deterred wholesale buyers, disruption at ports ahead of the end the Brexit transition, and a campaign to buy local.

FedEx has revealed the scale of the online shopping boom in the run-up to the US holiday season peak, reporting its highest quarterly sales on record after the logistics group handled millions of additional packages and implemented surcharges on shipments.

Elsewhere, Gucci will launch two online stores in China alongside ecommerce group Alibaba, as the high-end brand counts on a post-coronavirus boom in luxury goods spending in the country to offset sluggish sales in the west.

But the academic Adam Tooze warns that while scientists may have provided a miraculous fix for Covid-19, history shows that any path to recovery will be long.

Reflecting the spirit of seasonal goodwill, he says we should “forgo austerity measures in favour of generous crisis relief for those most in need, and long-term investment in the transition to green energy”.

For the latest coronavirus news visit our live blog

Markets

Absolute Strategy Research, an investment consultancy, found in its latest quarterly survey of 200 asset allocators, chief investment officers, investment strategists and economists, that 71 per cent thought global equities would be higher in a year’s time. This created the “risk of groupthink”, it warned.

Line chart of IPO volumes by deal value ($bn) showing that London lags leading exchanges for new listings

While the City of London remains a global superpower in a number of areas of finance, its stock market is struggling with weak returns and a lack of big tech stocks. Lacking the megacap tech stocks that dominate in the US and China, the FTSE 100 is now trading at one of the widest price-to-earnings discounts to the S&P 500 for 15 years. This is part of our Future of the City series.

The Federal Reserve’s emergency lending programme for small and midsize businesses has recorded a jump in demand with just weeks to go before it is shut down over the objections of the US central bank. For the week ending Wednesday, the Fed lent out an additional $2.7bn through the Main Street Lending Program, created to help struggling businesses that are not big enough to access the bond market.

Business

Restaurant owners have highlighted the crippling effects of a second lockdown within six months in England as well as tough restrictions still in place across the UK. The Restaurant Group, which owns chains including Wagamama and Frankie & Benny’s, reported higher cash burn during England’s second lockdown. Fulham Shore, which owns Franco Manca and The Real Greek, posted first-half revenue down 45 per cent to £19.9m.

The US Food and Drug Administration will grant emergency approval to the Moderna coronavirus vaccine in the coming days, making it the first country to have authorised two inoculations against the virus. The EU has requested a further 80m doses from the company, doubling the size of its orders.

Barclays retail bank chairman Ian Cheshire is stepping down after four years helping to establish and lead the UK unit of the lender, which is set for a major overhaul in the coming years after its profits collapsed amid coronavirus. Sir Ian, 61, will be replaced by Crawford Gillies at the end of the year and will leave the board in May.

Global economy

Vendors have been offering coronavirus vaccines for sale on hidden parts of the internet days after the first Covid-19 shot was approved this month, as criminals seek to profit from global demand for inoculations. Experts said that many of the vaccines for sale on the dark web were either fake or would never be shipped. 

A political flare-up over the Federal Reserve’s pandemic crisis lending programmes has emerged as a late stumbling block to a $900bn fiscal stimulus package as US congressional leaders rushed to complete the deal. Pat Toomey, a Republican senator, sought to insert a provision in the legislation that would prevent the Fed from reviving several emergency credit facilities that are due to expire at the end of the year.

Line chart of monthly UK property transactions, above £40,000 (thousands) showing that the UK housing market saw a strong 'V'-shaped recovery after lockdown

The feverish demand for UK property has stood out in the gloom of the wider economy. After lockdown brought the homebuying process to a near standstill in March, it roared back to life from May, fuelled by the desire for bigger, more comfortable properties triggered by the shift to working from home and the nine-month stamp duty holiday announced in July.

The essentials

Follow our coronavirus vaccine tracker, updated every week, as well as our global economic impact tracker and our coronavirus tracker on the spread of infection around the world.

Final thought

John le Carré, the spy fiction master
John le Carré, the spy fiction master ©  Greg Funnell/Camera Press | John le Carré

Simon Schama argues that John le Carré, the spy fiction master, ventured well beyond the shadows of espionage to become one of the most perceptive and enduring writers of his age. His writing was “often surprisingly tender amid the carnage, exactingly watchful, brimming with sensuous plenitude, even on rain-sodden city streets, and with the bloody beat of life pounding away on every page”.

We would really like to hear from you. Please send your reactions or suggestions to covid@ft.com. Thanks



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US stocks rise as investors weigh strong earnings against spread of Delta variant

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Equities updates

Stocks on Wall Street edged higher on Tuesday as strong company earnings and economic data offset worries about the spread of the Delta coronavirus variant and fears over another regulatory clampdown from Beijing.

The blue-chip S&P 500 was up 0.7 per cent by mid-afternoon in New York, its best performance in more than a week. The tech-focused Nasdaq Composite climbed 0.3 per cent.

Investor sentiment was lifted by June data for US factory orders, which typically feed into estimates of gross domestic product. New orders for goods rose 1.5 per cent on the month before, well above the consensus estimate of 1 per cent.

In Europe, another wave of strong earnings results helped propel the continent’s stocks to a fresh record. The region-wide Stoxx 600 index rose 0.2 per cent after Paris-based bank Société Générale and London-listed lender Standard Chartered reported profits that beat analysts’ expectations.

London’s energy-leaning FTSE 100 index rose 0.4 per cent, aided by oil major BP, which rallied after announcing a $1.4bn share buyback programme and an increase in its dividend.

Line chart of Stoxx Europe 600 index showing Strong earnings help propel European shares to record high

On both sides of the Atlantic, earnings have been strong. More than halfway through the US reporting season, 86 per cent of companies have topped expectations on profits, while in Europe 55 per cent have outperformed so far, according to data from FactSet and Morgan Stanley.

“The continued healthy earnings outlook is a key driver of our view that the equity bull market remains on solid footing,” analysts at UBS Wealth Management wrote in a note. Such a growth rate is, however, “flattered by depressed levels in the year-ago period,” they said. “But the results are still impressive compared with pre-pandemic earnings.”

Oil slipped in a choppy session as the global benchmark Brent crude fell 0.7 per cent to $72.37 a barrel on fears that the spread of the Delta variant could depress demand for fuel.

The seven-day rolling average for new coronavirus cases in the US, the world’s largest economy, have hit nearly 85,000 from about 13,000 a month ago, according to the Financial Times coronavirus tracker. Similar trends have taken hold in other countries as well as authorities race to vaccinate larger swaths of their populations.

A log-scale line chart of seven-day rolling average of newcases showing that US coronavirus case counts rise from just over 10,000 in mid-June to nearly 100,000 by early August

In Asia, investors were again focused on regulation after Chinese state media criticised the online video gaming industry, calling it “spiritual opium”. Shares in Tencent, the Chinese internet group, fell 6 per cent before announcing it would implement new restrictions for minors on its gaming platform. NetEase and XD, two rivals, dropped 7.8 per cent and 8.1 per cent, respectively.

The Hang Seng Tech index, which includes Tencent and its peers, dropped 1.5 per cent, lagging behind the wider Hong Kong bourse, which slipped 0.2 per cent. The CSI 300 index of large Shanghai- and Shenzhen-listed stocks was flat.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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Why it might be good for China if foreign investors are wary

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Chinese economy updates

The writer is a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

The chaos in Chinese stock markets last week was exacerbated by foreign investors selling Chinese shares, leaving Beijing’s regulators scrambling to regain their confidence while they tried to stabilise domestic markets. But if foreign funds become more cautious about investing in Chinese stocks, this may in fact be a good thing for China.

In the past two years, inflows into China have soared by more than $30bn a month. This is partly because of a $10bn-a-month increase in the country’s monthly trade surplus and a $20bn-a-month rise in financial inflows. The trend is expected to continue. Although Beijing has an excess of domestic savings, it has opened up its financial markets in recent years to unfettered foreign inflows. This is mainly to gain international prestige for those markets and to promote global use of the renminbi.

But there is a price for this prestige. As long as it refuses to reimpose capital controls — something that would undermine many years of gradual opening up — Beijing can only adjust to these inflows in three ways. Each brings its own cost that is magnified as foreign inflows increase.

One way is to allow rising foreign demand for the renminbi to push up its value. The problem, of course, is that this would undermine China’s export sector and would encourage further inflows, which would in turn push China’s huge trade surplus into deficit. If this happened, China would have to reduce the total amount of stuff it produces (and so reduce gross domestic product growth).

The second way is for China to intervene to stabilise the renminbi’s value. During the past four years China’s currency intervention has occurred not directly through the People’s Bank of China but indirectly through the state banks. They have accumulated more than $1tn of net foreign assets, mostly in the past two years.

Huge currency intervention, however, is incompatible with domestic monetary control because China must create the renminbi with which it purchases foreign currency. The consequence, as the PBoC has already warned several times this year, would be a too-rapid expansion of domestic credit and the worsening of domestic asset bubbles. 

Many readers will recognise that these are simply versions of the central bank trilemma: if China wants open capital markets, it must give up control either of the currency or of the domestic money supply. There is, however, a third way Beijing can react to these inflows, and that is by encouraging Chinese to invest more abroad, so that net inflows are reduced by higher outflows.

And this is exactly what the regulators have been trying to do. Since October of last year they have implemented a series of policies to encourage Chinese to invest more abroad, not just institutional investors and businesses but also households.

But even if these policies were successful (and so far they haven’t been), this would bring its own set of risks. In this case, foreign institutional investors bringing hot money into liquid Chinese securities are balanced by various Chinese entities investing abroad in a variety of assets for a range of purposes.

This would leave China with a classic developing-country problem: a mismatched international balance sheet. This raises the risk that foreign investors in China could suddenly exit at a time when Chinese investors are unwilling — or unable — to repatriate their foreign investments quickly enough. We’ve seen this many times before: a rickety financial system held together by the moral hazard of state support is forced to adjust to a surge in hot-money inflows, but cannot adjust quickly enough when these turn into outflows.

As long as Beijing wants to maintain open capital markets, it can only respond to inflows with some combination of the three: a disruptive appreciation in the currency, a too-rapid rise in domestic money and credit, or a risky international balance sheet. There are no other options.

That is why the current stock market turmoil may be a blessing in disguise. To the extent that it makes foreign investors more cautious about rushing into Chinese securities, it will reduce foreign hot-money inflows and so relieve pressure on the financial authorities to choose among these three bad options.

Until it substantially cleans up and transforms its financial system, in other words, China’s regulators should be more worried by too much foreign buying of its stocks and bonds than by too little.



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Square to acquire Afterpay for $29bn as ‘buy now, pay later’ booms

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Square Inc updates

Payments company Square has reached a deal to acquire Australian “buy now, pay later” provider Afterpay in a $29bn all-stock transaction that would be the largest takeover in Australian history.

Square, whose chief executive Jack Dorsey is also Twitter’s CEO, is offering Afterpay shareholders 0.375 shares of Square stock for every share they own — a 30 per cent premium based on the most recent closing prices for both companies.

Melbourne-based Afterpay allows retailers to offer customers the option of paying for products in four instalments without interest if the payments are made on time.

The deal’s size would exceed the record set by Unibail-Rodamco’s takeover of shopping centre group Westfield at an enterprise value of $24.7bn in 2017.

The transaction, which was announced in a joint statement from the companies on Monday, is expected to be completed in the first quarter of 2022.

Afterpay said its 16m users regard the service as a more responsible way to borrow than using a credit card. Merchants pay Afterpay a fixed fee, plus a percentage of each order.

The deal underscored the huge appetite for buy now, pay later providers, which have boomed during the coronavirus pandemic.

“Square and Afterpay have a shared purpose,” said Dorsey. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Adoption of buy now, pay later services had tripled by early this year compared with pre-pandemic volumes, according to data from Adobe Analytics, and were particularly popular with younger consumers.

Rivalling Afterpay is Sweden’s Klarna, which doubled its valuation in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.

Steven Ng, a portfolio manager at Afterpay investor Ophir Asset Management, said the deal validated the buy, now pay later business model and could be the catalyst for mergers activity in the sector. “Given the tie-up with Square, it could kick off a round of consolidation with other payment providers where buy now, pay later becomes another payment method offered to their customers,” he said.

Over the past two years Afterpay has expanded rapidly in the US and Europe, which now account for more than three-quarters of its 16.3m active customers and a third of merchants on its platform. Afterpay said its services are used by more than 100,000 merchants across the US, Australia, Canada and New Zealand as well as in the UK, France, Italy and Spain, where it is known as Clearpay.

Square intends to offer the facility to its merchants and users of its Cash App, a fast money transfer service popular with small businesses and a competitor to PayPal’s Venmo.

“It’s an expensive purchase, but the buy now, pay later market is growing very rapidly and it makes a lot of sense for Square to have a solid stake in it,” said retail analyst Neil Saunders.

“For some, especially younger generations, buy now, pay later is a favoured form of credit. Afterpay has already had some success with its US expansion, but Square will be able to accelerate that by integrating it into its platforms and payment infrastructure — that’s probably one of the justifications for the relatively toppy price tag of the deal.”

Square handled $42.8bn in payments in the second quarter, with Cash App transactions making up about 10 per cent, according to figures released on Sunday. The company posted a $204m profit on revenues of $4.7bn.

Once the acquisition is completed, Afterpay shareholders will own about 18.5 per cent of Square, the companies said. The deal has been approved by both companies’ boards of directors but will also need to be backed by Afterpay shareholders.

As part of the deal, Square will establish a secondary listing on the Australian Securities Exchange to provide Afterpay shareholders with an option to receive Square shares listed on the New York Stock Exchange or the ASX. Square may elect to pay 1 per cent of the purchase price in cash.

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