European stock markets have finished the day where they started it.

The FTSE 100 finished virtually unchanged at 7125 points, with airline group IAG (-2.2%), hotel operator Whitbread (-1.9%), falling on concerns that Covid-19 will surge after restrictions in England are lifted

Commercial property firms Land Securities and British Land both fell 1.6%, with the government now recommending a ‘gradual’ return to the office over the summer.

Among smaller companies, Cineworld tumbled 7% as investors questioned whether customers will flock back while the pandemic continues. Mask-wearing will not be compulsory, which might put some customers off, while venues could still request it (which could deter other patrons).

Danni Hewson, AJ Bell financial analyst, says:

On the FTSE 250 Cineworld has taken another battering as Britons get to grips with the mask conundrum. Big titles might now be making big money at the box office but are consumers ready to sit side-by-side with movie goers when restrictions are eased?

The pan-European Stoxx 600 finished the day just 0.03% higher at 460.96, with Germany and France both flat.

US inflation has accelerated to a new 13-year high, as consumers are hit by rising price pressures as the economy recovers from the pandemic.

The annual consumer prices index rose by 5.4% in the 12 months to June, up from 5% in the year to May. That’s the largest increase since August 2008 (when it also rose 5.4%), and higher than economists and investors had expected.

On a monthly basis, consumer prices rose by 0.9% in June, up from 0.6% in May, which is the largest one-month change since June 2008.

Core inflation (which strips out food and energy) also rose by 0.9% in June, and by 4.5% percent over the last 12 months -- the biggest annual jump in 30 years.

That will challenge the idea that the burst of inflationary pressures this year will be temporary, as the Federal Reserve argues.

The index for used cars and trucks continued to rise sharply, increasing 10.5% in June.

This increase accounted for more than one-third of the seasonally adjusted all items increase, the Bureau for Labor Statistics say.

The food index increased 0.8 percent in June, up from 0.4% in May.

Energy prices also pushed up the cost of living - with the energy index increased 1.5 percent in June, with the gasoline index rising 2.5 percent over the month.

The energy index rose 24.5 percent over the last 12-months, and the food index increased 2.4 percent, the BLS adds.

JP Morgan has got the bank reporting season up and running, with a surge in profits in the last quarter.

JPMorgan Chase & Co posted net income of $11.9bn, or $3.78 per share, in the three months to June 30, beating forecasts. That’s around 150% more than the $4.7bn, or $1.38 per share, earned a year earlier at the start of the pandemic.

JP Morgan benefitted from strong dealmaking, with ‘gross investment banking revenues’ surging 37%. It also released around $3bn from reserves it had set aside to cover loan defaults due to the pandemic.

Revenue fell 7% to $31.4 billion, but were ahead of forecast.

Analysts had expected earnings of $3.21 per share, according to Refinitiv data.

Jamie Dimon, Chairman and CEO, said the economic outlook was improving, but cautioned that the release of reserves had improved the profit figures.

This quarter we once again benefited from a significant reserve release as the environment continues to improve, but as we have said before, we do not consider these core or recurring profits. Our earnings, not including the reserve release, were $9.6 billion.

Consumer and wholesale balance sheets remain exceptionally strong as the economic outlook continues to improve. In particular, net charge-offs, down 53%, were better than expected, reflecting the increasingly healthy condition of our customers and clients.”

Investors are ‘much less bullish’ about the prospects for growth, profits and inflation, according to the latest fund manager survey from Bank of America.

BofA’s monthly poll of clients found that the cyclical “boom” has peaked, with growth expectations weaker in July.

Some 73% of investors now think the economy was now in either mid- or late cycle, even though the recovery only began a year ago.

This switch has seen investors move away from the ‘reflation’ trade, and back into technology stocks, as they dialled back their expectations on growth, price pressures and higher rates.

BofA’s top strategist Michael Hartnett explained that fiscal optimism was fading, with expectations of US infrastructure stimulus down to $1.4tn from $1.9trn in April.

Here are the key points from BofA’s Global Research report:

• Investors much less bullish on growth, profits, inflation, yield curve steepening due to peaking PMIs, fiscal stimulus, China
• No unwind in long stocks, commodities, cyclicals; junk>quality, small>large, value>growth reflation trades back to Oct’20
• H2 contrarian trades: bonds>commodities on growth shock, short stocks on rates shock, long small cap on inflation shock

Plus some charts:

The failure of the Opec group and its allies to agree a rise in oil production risks damaging the global recovery from the pandemic, and could spark a price war, the world’s energy watchdog says.

In its monthly report, the International Energy Agency (IEA) warns that “world oil markets are on edge” after Opec+ negotiations to boost supply were deadlocked.

The IEA says this failure means the world economy will face shortages of oil, meaning high prices that could hurt the global recovery [Brent crude hit its highest level since October 2018 last week, over $77 per barrel].

Plus, there is the possibility that producers abandon their agreement to restrict supplies and start pumping more oil, the IEA says:

Oil prices reacted sharply to the OPEC+ impasse last week, eyeing the prospect of a deepening supply deficit if a deal cannot be reached.

At the same time, the possibility of a market share battle, even if remote, is hanging over markets, as is the potential for high fuel prices to stoke inflation and damage a fragile economic recovery.

The uncertainty over the potential global impact of the Covid-19 Delta variant in the coming months is also tempering sentiment.

The Opec+ group failed to agree to raise production by 400,000 barrels per month from August, and extend their existing output curbs to the end of 2022. The UAE blocked it, unless its baseline was lifted to allow it to pump more.

The IEA says that, without a compromise, production quotas will remain at July’s levels. That means oil markets will tighten significantly as demand rebounds from last year’s Covid-induced plunge, and more people return to the roads as restrictions are lifted.

A rise in fuel prices could encourage people to shift to electric vehicles, the IEA adds, while also denting growth:

While prices at these levels could increase the pace of electrification of the transport sector and help accelerate energy transitions, they could also put a drag on the economic recovery, particularly in emerging and developing countries.

The Financial Stability Report also flags up that the UK housing market was its hottest in a decade in the last six months, saying:

House price growth and housing market activity during 2021 H1 were at their highest levels in over a decade, reflecting a mix of temporary policy support and structural factors.

Official data shows that house prices jumped by around 9% in the year to April, although more recent data from Halifax shows they dipped 0.5% in June.

The BoE predicts that demand could remain robust even once the temporary stamp duty holiday ends [it has been reduced in England and Northern Ireland, but finished in Scotland and Wales]

Recent high levels of activity are likely to reflect in part a temporary boost provided by the stamp duty holiday, as shown by the peak in housing transactions completing in March 2021 ahead of its original deadline. They may also partially reflect structural factors such as households prioritising additional space to accommodate flexible working arrangements and increased savings accumulated during the pandemic, as well as the continued low interest rate environment. There are similar trends in some other advanced economies.

Other, timelier indicators of house prices than the UK HPI remain strong, suggesting that some of that strength in demand may persist beyond the end of the stamp duty holiday in September.

Shares in mining companies are also higher this morning, after stronger-than-expected trade data from China calmed worries about an economic slowdown.

The 32.2% surge in exports in June (compared to last year), and the 36.7% jump in imports indicates the Chinese economy is faring better than analysts had feared.

Anglo American (+1.5%) and Rio Tinto (+1.1%) are higher, tracking a rise in commodity prices amid expectations of higher demand for coal, iron ore, copper, nickel etc.

Sophie Altermatt, economist at Julius Baer, says:

Trade data came in better than expected, with export growth rebounding as global demand stayed strong and imports moderating less than expected.

Exports will likely remain a growth driver for the Chinese economy in the near term. With a higher base, trade growth is likely to level off from over the coming months, but the global recovery and fiscal support in developed economies remain supportive for solid exports, although demand will likely start to shift towards domestic services consumption.

The unexpected acceleration of export growth—despite the expected drag from supply shortages and delays at some ports in the Guangdong province, due to local Covid-19 outbreaks—implied that global demand remained strong, supporting Chinese exports.

The Bank of England’s top officials were also asked about whether they’re concerned about the boom in private equity takeovers, which often leave companies severely indebted, following leverage buyouts.

Governor Andrew Bailey said the bank doesn’t take a view on private equity, but there are general concerns about corporate leverage, particularly in terms of their ability to withstand shocks like the Covid crisis.

He told reporters this morning:

“Companies that increased their leverage beyond levels that are safe and sustainable are of course in a much less resilient position when a shock comes along and we’ve had a very big one.

And so I think that very clear message should be to companies: Leverage matters.

It matters … from the point of view of the resilience of your own financial position and therefore you need to have regard to it. That’s not a point, per se, about private equity, it’s a point about leverage.

If you are a highly leveraged company you’re going to be more exposed to the sorts of shocks that I’m afraid can happen.”

Shares in UK-listed banks are among the risers on the FTSE 100 this morning, after the BoE lifted the restrictions on dividend payouts introduced in the Covid-19 pandemic.

Lloyds Banking Group (+2.1%) are the top riser, up a penny at 48.1p, followed by NatWest (+1.7%), with Barclays (+1.3%), HSBC (+1.4%) and Standard Chartered (+1.1%) all higher.

That’s helped the FTSE 100 gain 25 points, or 0.35%, to 7150 points.

Asked whether the Bank of England’s call to ban and then cap dividend payments during the Covid crisis last year was “overkill,” Andrew Bailey has firmly disagreed.

The BoE governor tells reporters:

“A year ago we were in an unprecedented situation. I think it’s very important not to apply judgement of hindsight.

“That was a very appropriate step to take….we mustn’t forget the emergency situation we were in a year ago.”

[Reminder: at the end of March 2020, Britain’s banks scrapped nearly £8bn worth of dividends, to help them weather the economic downturn]

Deputy governor Sam Woods also weighs in, explaining why the Bank lifted its restrictions on dividend payments today.

We’ve always been clear that we wanted to come back to our normal approach to capital setting and dividends.

We described in December the guardrails we put in place as temporary and as a stepping stone to normality and said we would come out again now in July, informed by the stress tests, so [that’s] where we find ourselves today”.

Bank of England governor Andrew Bailey is leading a press conference on the results of the financial stability report.

He says Covid has been testing the resilience of banks and the effectiveness of new rules introduced in the wake of the financial crisis, and the results are “encouraging”:

“This has been the first big test of the post-financial crisis reforms, notably to the resilience of banks, and so far the results have been encouraging. In recent months the rapid rollout of the UK vaccination programme has led to an improvement in the UK economic outlook.

But the risks of that recovery remain and households and businesses will need continuing support from the financial system.”

The Bank of England is also calling for new measures to address the financial stability risks that could be created by banks moving core services to the cloud, as there are only a few cloud service providers.

The pandemic has accelerated the move to cloud-based bank services, as more people embraced digital banking.

And in today’s financial stability report, the Financial Policy Committee warns the financial system is relying on a small number of providers [the market includes Amazon Web Services and Microsoft’s Azure, for example].

It says:

The FPC has previously highlighted that the market for cloud services is highly concentrated among a few cloud service providers (CSPs), which could pose risks to financial stability. Since the start of 2020, financial institutions have accelerated their plans to scale up their reliance on CSPs.

Although the PRA [Prudential Regulation Authority] and FCA [Financial Conduct Authority] have recently strengthened the regulation of firms’ operational resilience and third party risk management, the increasing reliance on a small number of CSPs and other critical third parties could increase financial stability risks without greater direct regulatory oversight of the resilience of the services they provide.

The FPC is of the view that additional policy measures to mitigate financial stability risks in this area are needed, and welcomes the engagement between the Bank, FCA and HM Treasury on how to tackle these risks. The FPC recognises that absent a cross-sectoral regulatory framework, and cross-border co-operation where appropriate, there are limits to the extent to which financial regulators alone can mitigate these risks effectively.

Despite the pressures of the pandemic, the UK banking system has the capacity to provide the support the economy needs, the Bank says.

The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast.

This judgement is supported by the interim results of the 2021 solvency stress test.

But, the report also warns that UK households may face additional pressure if downside risks to the economic outlook crystallise, and the job protection furlough scheme is still wound up.

The full effect of the pandemic on households’ finances will become clearer as the economy recovers and broader government support for household income unwinds fully, particularly the CJRS, which the Government has announced will run until 2021 Q3.

Under the MPC’s May forecast, the projected increase in unemployment associated with the closure of the CJRS is relatively low as the support ends when activity is projected to be much closer to its pre-pandemic level. But if the economic outlook deteriorated without further support, the increase in unemployment and reduction in household income could be more severe than in the MPC’s forecast.

And lower-income families are most exposed to risks, the FPC say, having suffered the biggest income hit from Covid-19, while wealthier families boosted their savings.

Should this risk crystallise, a combination of factors suggests that losses are more likely to arise from consumer credit than mortgage debt.

Historically, there has been a strong correlation between unemployment and consumer credit loss rates. Relative to mortgages, unsecured debt is also more concentrated at the lower end of the income distribution. And lower income households have fared less well through the pandemic as they faced more persistent shocks to income and were less likely to accumulate savings.

The Bank of England has lifted all Covid restrictions on dividends at the UK’s largest lenders, paving the way for a boom in payouts even as the pandemic continues.

Officials said banks were strong enough to weather the remainder of the Covid pandemic, and that interim results from the upcoming stress tests – due in December – showed the banking sector “remains resilient” despite continued uncertainty.

“Extraordinary guardrails on shareholder distributions are no longer necessary,” the financial policy committee said.

The announcement will be welcomed by shareholders, who have had their payouts curbed for 16 months.

The regulator forced lenders to scrap roughly £8bn worth of dividends as well as share buybacks in March 2020 in the hope of giving banks an additional cushion to weather an economic downturn sparked by the Covid crisis.

Here’s the full story:

The Bank of England fears that insolvencies could rise among UK firms when the government unwinds its support packages as the economy recovers.

The ending of the furlough scheme [Coronavirus Job Retention Scheme] this autumn, the looming repayments on rescue loans, and the end of the temporary restrictions on winding-up petitions will all put pressure on some firms.

The Financial Stability Report says that UK corporate debt vulnerabilities have only increased modestly over the pandemic, before warning:

But as the economy recovers and government support unwinds as planned, some businesses may face additional pressure on their cash flow and insolvencies could increase…

For example, businesses may face substantial repayments as VAT and rent deferrals begin to lapse, costs could increase as broader government support such as the CJRS unwinds, and businesses that have borrowed under government support schemes will need to start making repayments on them. Additionally, the end of the temporary ban on winding up petitions in September 2021 is likely to lead to an increase in insolvencies over the next twelve months.

Small companies, and those most hit by economic restrictions, will face the most pressure, it adds:

It is likely that some businesses have become more vulnerable to insolvency compared to before the pandemic. For example, those that were already facing challenges to their businesses models, or had weak balance sheets at the onset of the pandemic... may have seen their positions worsen.

This pressure could be particularly acute in sectors that are more affected by economic activity being curtailed further should Covid cases rise, such as accommodation and food, and there are some signs of stress emerging. For example, Bank staff analysis suggests that as of January 2021, 11.8% of SMEs in these sectors are already in arrears on their outstanding loans or have formally defaulted [see chart below].

5.5% of the broader SME population were in a similar situation in 2021 Q1, compared to 3.6% in 2020 Q1. This suggests that if earnings fall, for example if the economic outlook worsens, or should financing costs and debt-servicing burdens rise, SMEs could face further pressure.

On the economic front, the BoE says the financial system needs to keep supporting the wider economy as it recovers from the shock of the pandemic.

The UK financial system has provided support to households and businesses to weather the economic disruption from the Covid pandemic, reflecting the resilience that has been built up since the global financial crisis, and the exceptional policy responses of the UK authorities.

In recent months, the rapid rollout of the UK’s vaccination programme has led to an improvement in the UK economic outlook. But risks to the recovery remain. Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming months.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

There are signs of “increased risk taking” in global financial markets and “some asset prices look stretched”, the Bank of England warns this morning

In its latest Financial Stability Report, just released, the BoE flags up that asset prices have risen sharply in the last six months, with major equity indices up around 15% on average and corporate bond spreads tightening over the same period.

This increase in risk-taking behaviour creates the danger of “a sharp correction in asset valuations”, the Bank warns, if investors re-evaluate the prospects for growth or inflation, and therefore interest rates.

In a section titled “Increased risk-taking in global financial markets”, theFinancial Policy Committee (FPC) say:

Risky asset prices have continued to increase, and in some markets asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ in a low interest rate environment, and higher risk-taking.

The proportion of corporate bonds issued that are high-yield is currently at its highest level in the past decade, and there is evidence of loosening underwriting standards, especially in leveraged loan markets. This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.

The warning comes as both US and European stock markets are at record highs (although the UK market is still below its pre-pandemic levels).

The report warns that a correction in asset prices would hurt UK businesses and households, if it led to a rise in interest rates which pushed up borrowing costs:

Sharp decreases in asset prices can amplify economic shocks by impairing businesses’ ability to raise finance, primarily through increasing the cost of bond and equity issuance.

Additionally a sharp correction can directly affect the financial system, for example from banks taking losses on assets held in trading portfolios or by reducing the value of collateral securing existing loans, and by creating sharp increases in the demand for liquidity.

There are several possible triggers for such a correction. Market participants could reassess their outlook for growth should, for example, economic data disappoint. Participants could also adjust their assessment of prospects for inflation and therefore the future path of interest rates. Market intelligence suggests this possibility is high among investor concerns. Should such an adjustment take place, the resulting tightening in financial conditions could also exacerbate debt vulnerabilities from UK households and businesses

More to follow...

Also coming up today

Trade data from China today has beaten forecasts, easing fears of a slowdown. Exports rose by 32.2% year-on-year in June, the easing of lockdown measures and vaccination rollouts lifted demand.

That’s despite a pick-up in Cocid-19 cases in southern China that had caused delays in shipments at some major ports for much of June.

Imports growth also beat expectations, rising 36.7% year-on-year, partly due to high raw material prices, customs data showed on Tuesday.

The latest US inflation report, for June, will show whether price pressures are still elevated. Annual CPI is forecast to dip to around 4.9%, from May’s 13-year high of 5%.

And JP Morgan and Goldman Sachs will kick off the bank reporting season, with results for the second quarter of the year.

The agenda

• 7am BST: Bank of England financial stability report
• 8.30am BST: Bank of England press conference
• 7am BST: German inflation data for June
• 9am BST: IEA’s monthly oil market report
• 1.30pm BST: US inflation report for June