Top financial market stories of the week — Klarna’s $45.6 billion valuation, Bitcoin as legal tender & more…
Monday 7th June 2021 — Friday 11th June 2021
1. UK economy continues recovery, but lags behind G20 economies
The UK economy grew for the third month in a row, increasing by 2.3% in April, its fastest monthly growth since July last year. This was slightly below economists expectations of growth of 2.4%.
The services sector provided the biggest uplift, with output growing 3.4% during the month. Consumer-facing services surged as lockdown was eased, rising 12.7%. Retail, education and hospitality were the fastest-growing sectors, with some bars and restaurants able to begin serving customers outdoors. Spending in non-essential shops also drove significant growth as customers were allowed back into stores from mid-April in England, with clothes stores seeing a boost of 69.4%. However, the services sector remains 4.1% below pre-pandemic levels of February 2020. Life is due to return to normal on June 21st with restrictions being fully eased on this date, however, it is looking increasingly unlikely that this will happen due to a surge in cases from the Indian variant. This is likely to stunt growth and lead to a slowdown in June in the hospitality sector particularly.
One factor which may have led to lower-than-expected growth for the UK was greater imports than exports in April. Britain imported £20.1 billion of goods from beyond the EU in April, the most on records going back to 1997. Companies sold £12.9 billion worth of goods into the bloc and although this is an increase of 10% since last September, net exports still remained negative. Moreover, exports into the bloc were also about 9% lower than 2019’s pre-pandemic levels. This shows that UK exporters have lost market share.
The UK is also dragging behind other economies in the G20. The UK and Italy recorded the largest falls from pre-pandemic GDP levels, decreasing 8.7% and 6.4% respectively as shown in the graph below. However, the UK economy is expected to grow 7.25% in 2021, which means it will be placed fifth instead of at the bottom of the G20 economies if this does occur.
2. The ‘Buy Now Pay Later’ industry is booming, Klarna valuation reaches $45.6 billion
Klarna, the biggest ‘Buy Now Pay Later’ lender, has raised capital in a deal that values it at $45.6 billion, $14 billion more than at the time of its last fundraising in March. Their service allows people to finance their shopping purchases interest-free over a period of monthly instalments. This now means the firm is the biggest Fintech firm by value in Europe and the second-biggest in the world after Stripe. Softbank were the investors in this funding round, buying $639 million of equity at a higher price than the previous funding round where $1 billion was raised.
Klarna makes money by taking a fee from merchants each time a customer makes a transaction. It says merchants that use its service often see an increase in sales as a result. Klarna is also backed by Chinese fintech giant Ant Group and U.S. rappers Snoop Dogg and ASAP Rocky. It is thought that the firm may debut on the stock market through a direct listing in 2021.
The ‘Buy Now Pay Later’ industry has boomed during the pandemic as consumers have moved away from credit cards with high interest rates and fees. Typically, there’s no credit check required to qualify for a point-of-sale instalment loan. That can make this short-term financing attractive for people with limited credit history.
Moreover, yesterday, one of Klarna’s rivals, Hokodo (a ‘Buy Now Pay Later’ provider) raised $12.5 million (approx £8.8 million) in a funding round. They are a London and Paris-based firm who will use the proceeds towards further developing its digital credit technology and extending its services across Europe, supporting the growth of the $12 trillion B2B industry.
3. Crypto market update
Bitcoin formally recognised by Basel Committee but classed as the riskiest of assets
Bitcoin has been formally recognised as an asset class by the Basel Committee, the arbiter of international banking standards, by proposing rules for banks to hold the cryptocurrency. The rules will also apply to other leading cryptocurrencies like Ethereum. This lead to an immediate jump in the price of $2,000 for Bitcoin.
However, crypto’s have been classified as the riskiest of assets and the Basel Committee on Banking Supervision released a report on Thursday calling for cryptocurrencies to carry the toughest bank capital rules of any asset. The committee stated that although cryptocurrencies have been recognised as assets, there are still several concerns. These concerns include market and credit risk, fraud, hacking, money laundering and terrorist financing risk.
The committee proposed a risk weight of 1,250%. That would mean banks would in effect have to hold capital equal to the exposure they face, according to the Financial Times. This could be seen as over-regulation which could drive out activity of this kind as firms may be put off by the significant amount of regulation they would need to follow to hold assets of this type. Bitcoin shot up 1.5% to $37,306 on Friday morning in response to the news and is now hovering around the $37,250 mark. However, Ethereum crashed over 4% to trade at $2,463.
El Salvador becomes first country to accept Bitcoin as legal tender
The price of Bitcoin has risen more than $5000 since Tuesday. This has been helped by the fact that El Salvador has officially declared bitcoin as legal tender. This was in an effort to promote financial inclusion, investment and economic development.
The cryptocurrency’s use as legal tender, alongside the US dollar, will go into law in 90 days and the bitcoin/dollar exchange rate will be set by the market. Citizens will be able to pay their taxes in bitcoin and “every economic agent” will be required to accept the cryptocurrency as payment unless they lack access to the necessary technology. El Salvador also revealed plans to mine cryptocurrency using 100% renewable geothermal energy from volcanos.
Several other countries in Latin America could soon follow suit, with politicians in Argentina, Brazil, Mexico, Panama and Paraguay all expressing an interest in the cryptocurrency.
4. Will the travel industry ever recover?
It is no surprise that the tourism industry has suffered dramatically during the pandemic. With strict lockdowns across the world, the travel, tourism and leisure industry have been some of the hardest-hit. Whilst other service sectors of the economy have begun their recoveries with the easing of restrictions, the travel industry is lagging behind significantly. This is because the industry has not yet been given the chance to really take off again, with the UK making travel difficult with quarantine rules. The question now remains, will this industry ever recover from the losses suffered during the pandemic?
According to Abta, a travel association in the UK, about 307,000 jobs in the travel sector have already been lost. Further to this, Heathrow’s passenger numbers are dwindling significantly at 90% below pre-pandemic levels, the UK’s busiest airport said. Just 675,000 people travelled through the airport last month, compared with 6,769,000 in May 2019. Last month, according to the ONS, the number of visits to the UK declined by 73% to 11.1 million last year. Spending by overseas residents was also down sharply, falling by 78% to £6.2 billion.
The May to September period is crucial to the UK travel industry, with companies generating about two-thirds of their annual revenues over the summer season. UK residents made 23.8 million visits abroad in 2020, 74% than in 2019, according to the Office for National Statistics. It is expected that 2021 could be even worse than this. Last week, the government reduced the number of countries on its green list (countries people can travel to without vaccinations and without having to quarantine). A mere 12 countries remain on the green list at present. Without more countries being added soon, it is unlikely a significant rebound will take place in the travel and tourism sector in the second half of 2021.
However, many travel bodies have called for this system in the UK to be scrapped altogether. The World Travel and Tourism Council (WTTC) said ministers must scrap the complex restrictions to save the UK’s tourism sector from total collapse. No recognition is provided for fully vaccinated travellers under the UK scheme. The Chief Executive of the WTTC said: “What’s needed now is a watertight government policy enabling those who’ve been fully jabbed to travel freely, and not have to self-isolate on their return.” The body has warned that a further 218,000 jobs will be lost if policies are not changed.
It is obvious that the travel industry has been devastated by the pandemic and faces a long and strenuous road to recovery. The pace of its recovery will depend on the government and whether bodies will place enough pressure for restrictions on travel to be eased or systems to be changed. It also remains to be seen whether, once travel restrictions are lifted, the pent-up demand will be enough to save the industry from total collapse.
5. Equity market update
Global stocks hit record-highs
On Thursday, US inflation data was released. Consumer price inflation accelerated 5% in the 12 months to May, the largest year-on-year leap since 2008. However, investors largely brushed off inflation concerns with the S&P 500 index up 0.5 % to set a record. The Nasdaq Composite also climbed 0.8%.
European stocks hit a record high on Friday, in the hopes that major central banks will remain loose with their monetary policy despite signs of rising inflation. The European STOXX 600 index rose 0.3%.
The FTSE 100 by 0.6% after data showed Britain’s economic output in April was 2.3% higher than the month before. As recoveries in developed economies begin to strengthen, indexes have hit all-time highs this week. On Friday, the FTSE All-World index inched up 0.1% to its latest record.