Oil continues to slide, with Brent crude at its lowest since 1st October on concerns that pandemic restrictions will hit demand for energy:

Here’s a good round-up of the situation:

The rally into tech stocks, the ‘winners’ of the pandemic economy, has pushed the Nasdaq Composite to a new record high.

Jim Reid, research strategist at Deutsche Bank, also worries that the US could be vulnerable to a new wave of Covid-19 infections.

His Chart of the Day shows daily cases per million for a selection of large countries and regions plus interesting other countries, especially those in eastern Europe that seem to be going through an aggressive wave.

Reid explains:

For most of the countries near the top, the spike in cases has occurred fairly rapidly over the last couple of weeks. The exception is the UK where cases have been high and steady since the summer as high vaccination rates plus high infection rates have seemingly provided some degree of herd immunity. It’s important to bear in mind that testing rates vary considerably (the UK does the most per person in the G7) and that can affect the relative rankings, but the overall trend higher is clear.

The news is hitting European markets hard this morning as fears mount that the virus and restrictions will spread across the continent again. However the curveball might be the US. DB’s Robin Winkler has been pointing out that the vaccination rate in Austria (64%) is somewhat lower than the likes of Spain (79%), Italy (74%), France (69%), the UK (69%) and Germany (68%) but it is still higher than the US (58%).

So although all the headlines are in Europe at the moment, will the US be more vulnerable than many European countries over the course of the full winter? Recent history suggests the US have a higher bar for economic restrictions related to covid but it also has a lower vaccination rate than their European peers.

The jump in European Covid-19 infections is causing concerns that America could see a new wave too this winter.

Paul Ashworth, chief North America economist at Capital Economics, says the possibility of another winter wave of coronavirus infections is a significant downside risk to activity over the next few months.

He told clients:

We wouldn’t expect a winter COVID wave to trigger the types of restrictions on activity now being implemented in countries like Germany and Austria, particularly not when new therapeutics should further reduce the mortality rate.

But we would nevertheless expect such a wave to weigh on consumer spending on high-contact and travel services. Workplace outbreaks could also compound supply chain problems.

Our baseline GDP forecasts don’t explicitly allow for such a wave, but it is one of the key reasons why we are happy to be below consensus on the near-term growth outlook and why we doubt that the Fed will accelerate the pace of its QE taper in the next few months, opening the door to an earlier interest rate hike next year.

On Austria’s lockdown, Manuela Finger, partner at the Munich office of law firm, Gowling WLG, says:

“While a disappointing move for businesses and retailers especially at time when pre-Christmas footfall and sales are key, the Austrian government has clearly broadly considered the varied needs at play and come up with a solution that causes minimal business impact while protecting the health prospects of the nation.”

On the wires....

Nationwide Building Society has said there could be a “cooling” of the UK’s red-hot housing market because of rising inflation and interest rates.

Robert Gardner, the chief economist at the UK’s second-largest mortgage lender, said the housing market is currently “remarkably robust” despite the end of incentives such as the government’s stamp duty holiday at the end of September.

However, he said that in the coming months a lot would depend on the performance of the wider economy.

“There are a few things that could moderate [housing demand] a bit in the coming quarters. For example, there are not many homes on the market at the moment. That is likely to hold back activity.

“If you look at rising inflation squeezing household budgets a little and if interest rates rise, then that is likely to exert a cooling influence as well. But if the recovery holds up, then activity is likely to remain pretty solid.”

More here:

Back in the City, Ocado is defying the selloff with a 9% jump in its share price, to a two-month high.

It’s lifted by speculation that Marks & Spencer could acquire the remaining 50% of its retail joint venture with Ocado.

Interactive Investor’s Victoria Scholar explains:

Deutsche Bank raised its price target on M&S from 195p to 265p and suggested that it could be positioning itself to complete the deal. The note said, “cash flow is no longer being squandered on an unsustainable dividend but saved to recover the investment grade credit rating that may be required to buy out Ocado.”

In Marks & Spencer’s latest results, Ocado customer orders grew by 19% but revenue fell because of tough comparables last year during lockdown.

The 50% Ocado acquisition in 2019 was perfectly timed ahead of the pandemic and has provided M&S with access to new customers concentrated in different geographies. The purchase has also contributed towards M&S’ goal to encourage more family sized shops rather than top-up or convenience baskets.

Ocado’s share price has been struggling this year with the stock down by around a third since the January peak.

Mark Dowding, CIO at BlueBay Asset Management, argues that lockdowns will not derail the trajectory towards economic recovery, and that the current wave of Covid-19 is less scary than previous ones.

Vaccination offers the answer, not lockdown restrictions, Dowding writes in his latest weekly market commentary.

If anything, an acceleration in infections leads to an uptake in jabs and therefore much of this dynamic should be self-correcting, he says:

Covid infections accelerated during the past week across Europe, prompting some government moves to impose renewed restrictions on mobility and working from home. However, we doubt these steps will be far-reaching and think it unlikely that a trajectory towards economic recovery will be derailed in the weeks ahead.

The experience in the UK over the past couple of months has seen Covid cases rise materially, only then to plateau with hospitalisation and death rates far below prior waves of infection. Moreover, in the UK, it can be observed that the general attitude to mask wearing has been far less compliant than on the continent, with those of us using public transport observing less than half of users wearing face coverings, even during busy rush hour periods. In this way, the recent acceleration of Covid cases in the EU may appear concerning when viewed on a standalone basis, but it is much less of a worry seen in this context.

Nervous investors are also diving into government bonds, pushing down the yield (or interest rate) on benchmark US Treasuries.

The euro has now hit a fresh 16-month low, down 1% today at $1.125 for the first time since July 2020.

Fears that lockdowns will be imposed in other European countries are hitting stocks and oil today, says Fawad Razaqzada, analyst at ThinkMarkets.

Coronavirus has made an unwelcome return in the last few weeks, with cases rising to record levels in countries such as Germany and Austria despite the ongoing vaccination efforts.

In response, the Austrian government has reimposed a full lockdown and has made vaccination mandatory. Meanwhile, the German health minister Spahn has also refused to rule out a return to lockdown in Germany. So, it is not necessarily about Austria, but concerns that similar lockdown measures might be introduced to other parts of Europe is what has weighed on sentiment today.

There is now a risk for at least a short-term correction as investors wake up to the risks facing the Eurozone economy, after the major stock indices hit repeated all-time highs in recent weeks.

Helge Pedersen, group chief economist at Nordea bank, also fears Europe could see more restrictions shortly, given the infection rates in Central Eastern countries.

Stocks have fallen sharply in Vienna, after Austria’s national lockdown was announced.

The Austrian Traded Index, or ATX, has tumbled 2.7% to a three-week low. Banks, energy and industrial stocks are worst hit.

The euro has dropped close to a 16-month low, by Austria’s lockdown and the prospect that the European Central Bank will resist pressure to tighten monetary policy soon.

The single currency is down three-quarters of a cent at $1.129, extending its losses against rival currencies.

Fears of wider lockdowns are hitting the euro. Stephane Ekolo, global equity strategist at brokerage Tradition, says (via Reuters):

“One thing is certain, if the whole of Europe had to go under lockdown once more, and depending on how long that would last, we would need to rethink our growth scenarios”

Oil, a good gauge of growth prospects, has fallen too.

Brent crude is down nearly 3%, or $2.40 per barrel, to below $79 per barrel (updated).

Ryanair is pressing ahead with plans to delist from the London Stock Exchange because of foreign ownership and control rules that apply because of Brexit.

The low-cost airline, which indicated earlier this month that it intended to become solely listed in Dublin, said that its last day of trading on the London Stock Exchange would be 17 December.

The jump in retail sales last month has pushed the pound back towards 21-month highs against the euro.

Sterling is approaching €1.19, the level it breached on Wednesday after UK inflation jumped even faster than expected.

Victoria Scholar, head of investment at interactive investor, has the details:

UK retail sales gained 0.8% in October, the first monthly gain in six as many consumers brought forward their Christmas shopping amid concerns about shortages and excitement after a lost family Christmas last year. Non-food items such as toys, sports equipment and clothing outperformed while fuel and food fell, although food is back above pre-pandemic levels.

Consumers enjoyed getting back into physical stores in October with online sales accounting for the smallest proportion of overall sales since the height of the pandemic. However online shopping is still 20% higher than it was before covid, signalling a permanent change in preferences.

The grocery tech business Ocado is trading sharply higher, flourishing at the top of the FTSE 100 as retail stocks catch a bid. Sainsburys and Next are also towards the top of the basket.

The upbeat data provided a lift to the pound, which is inching closer once again to 21-month lows against the euro. EUR/GBP is a whisper away from breaking key support at £0.84, with a push below potentially paving the way for further sterling strength. The pound has gained nearly 3% since the end of September with advances accelerating this month.

However, both the euro and the pound have dropped against the US dollar this morning. The greenback has strengthened as investors wonder how the Federal Reserve will react to US inflation hitting 30-year highs.

The chief executives of Germany’s two top banks, Deutsche Bank and Commerzbank, warned about inflation on Friday, while the chairman of BNP Paribas said the real issue is growth, reports Reuters:

The bankers were speaking at a conference in Frankfurt as investors closely watch the European Central Bank for its reaction to accelerating inflation.

Deutsche Bank CEO Christian Sewing said inflation will “persist for longer” and Commerzbank CEO Manfred Knof said “we believe inflation is going to stay.

Sewing also said a reaction from the ECB was needed earlier than ECB President Christine Lagarde had just suggested [see our earlier post].

But BNP Paribas Chairman Jean Lemierre said slightly higher inflation “would not be bad” and that there should not be an “endless discussion” about inflation.

“The real question today is not inflation but growth,” he said.

Over in Frankfurt, European Central Bank President Christine Lagarde has reiterated that it would be a mistake to tighten monetary policy now, despite inflation hitting 4.1% last month.

She told the 31^st Frankfurt European Banking Congress that the factors driving inflation to double the ECB’s target, such as supply chain problems side and energy prices, are likely to fade in the medium term.

They will also probably slow the pace of the recovery in the near term, meaning the ECB should continue nurturing growth, by not withdrawing policy support too soon.

Lagarde says:

When inflation pressure is expected to fade – as is the case today – it does not make sense to react by tightening policy. The tightening would not affect the economy until after the shock has already passed.

She added:

Tightening policy prematurely would only make this squeeze on household incomes worse. At the same time, it would not address the root causes of inflation, because energy prices are set globally and supply bottlenecks cannot be remedied by the ECB’s monetary policy.

The rebound in retail sales in October adds to the evidence that activity held up well in October.

It will also raise expectations that the Bank of England will hike interest rates from 0.10% to 0.25% in December, says Adam Hoyes, assistant economist at Capital Economics.

He explains:

The retail sales data tally with the uptick in GfK consumer confidence overnight, and are another sign that the economy has held up fairly well at the start of Q4.

What’s more, it doesn’t seem as though the increase in retail spending came at the expense of non-retail spending. Card payments data show that spending on socialising reached its highest level since the onset of the pandemic in October.

Although retail sales overall are above pre-pandemic levels, it remains a mixed picture, says ONS chief economist Grant Fitzner.

Samuel Tombs of Pantheon also suspects that Christmas shortage fears pushed up spending in October....

Worries about shortages this Christmas may have spurred people into shopping early.

Oliver Vernon-Harcourt, head of retail at Deloitte, explains:

“Concerns around stock shortages have encouraged early preparations for the festive period, though purchases so far indicate a mixed bag of goods. In a sign of normalisation, food categories fell -0.3% month-on-month, despite consumers stocking up on Halloween treats and other foodstuffs for bonfire and Diwali celebrations.

“However, non-food sales were up month-on-month by 4.2%. With larger Christmas gatherings expected as consumers intend to make up for 2020’s lost celebrations, we could see non-food sales accelerate further in the coming weeks, as consumers look for toys, partywear, and other seasonal goods. Clothing alone saw an increase of 6.2% in volume compared to the previous month, edging closer to pre-pandemic levels.

Spending on Halloween also boosted spending in the shops last month, reports Helen Dickinson, chief executive of the British Retail Consortium:

“Retailers will be relieved by the improvement in sales as they enter the final straight in the run up to Christmas. Footfall growth on UK streets is the highest among major EU economies, and this is clearly translating into consumer spend. Meanwhile online sales remain well above pre-pandemic levels as retailers ramp up their delivery and click-and-collect services.

There were big improvements in clothing and footwear sales, including formalwear, as social calendars filled up and the public became increasingly confident about going out. Furthermore, with Halloween heavily curtailed by the pandemic last year, October showed chocolates and children’s costumes selling a treat as families made the most of the occasion.

But... supply chain problems are still spooking the sector, and the cost of living squeeze is also hurting families.

Dickinson says:

“While retailers are putting in a gargantuan effort to ensure that essential food and gifts are ready for Christmas, they continue to be dogged by ongoing challenges supply chain problems. Labour shortages throughout the supply chains – from farms to distribution – are pushing up costs and creating some gaps on the shelves.

Nonetheless, retailers are prioritising Christmas essentials, and many have laid out their festive offerings a little earlier to ensure everyone has time to buy treats and decorations before the big day. Retailers are hopeful that demand will continue right through the golden quarter, however, challenges remain, with higher prices looming and many households facing rising energy bills.”

At 27.3%, online retail’s share of spending has fell to its lowest since the start of the pandemic.

But it’s still much higher than in February 2020, when online shopping made up 19.7% of the pie, showing the structural changes in the sector.

Jessica Moulton, senior partner and leader of the Retail and Consumer Packaged Goods Practice at McKinsey & Company, says:

“There appears to be some early Christmas buying compared to previous years, probably spurred by concerns about item availability. And a desire not to miss out on the festive season.

“Notably, the split between online and physical shopping seems stable, with online 8 percent points higher than before the crisis. Consumers are taking advantage of all the improvements retailers made to their online offers during covid - but they still prefer stores for 7 out of 10 purchases.”

And here’s Greg Wright, Yorkshire Post deputy business editor:

The 0.8% jump in retail sales across Great Britain last month is better than economists expected...

..after a run of falling sales since April’s reopening boost:

While Christmas shopping picked up, spending on fuel fell last month after the petrol crisis of late September.

Automotive fuel sales hit their lowest level since April, down 6.4% in October, after panic buying left people with full tanks.