Month: September 2022

Ever since Russia’s shocking announcement late on Friday it would cut natgas supplies via Nord Stream 1 it was clear that Monday’s Labor Day holiday in the US would be chaos, and sure enough, with US futures relatively flat and rangebound after the worst week for world shares since June….

… European stocks slumped and the euro fell Monday as the region’s worsening energy crisis guaranteeing a stagflationary recession for European, added to risks for a global economy already facing high inflation and a wave of monetary tightening.

Gazprom announced its decision to cut European gas after Group of Seven leaders agreed to implement a price cap on Russian oil as the Kremlin continues its war in Ukraine. Natural gas surged more than 30% in Europe and nations there could roll out special steps at the end of the week to rein in power costs. Germany plans a $65 billion package to shield consumers.

“Economies have been preparing for some sort of energy constraint and the prospect of rationing, but obviously compared to expectations at the beginning of the year, this is pretty close to the worst outcome,” Wei Li, BlackRock global chief investment strategist, said on Bloomberg Television. “So as we head into rest of the year, underweight equities at this juncture feels appropriate.”

The view that global shares already hit their bear-market low back in June is looking increasingly precarious. Europe’s intensifying energy crisis is the latest hit to sentiment, which was already under pressure from a wave of monetary tightening.

The Stoxx Europe 600 Index fell 1.2% after Russia’s Gazprom halted its key gas pipeline indefinitely, and on Monday clarified it would not resume pumping until sanctions have been lifted. Steelmaker Thyssenkrupp AG, car-parts manufacturer Valeo, chemicals firm BASF SE, cement maker Cie de Saint-Gobain and gas utility Uniper SE were among the worst performers. Energy stocks were among the few gainers on the Stoxx Europe 600 benchmark as oil rallied after OPEC+ unexpectedly announced it would cut output by 100Kb/d. Here are the other notable movers:

• Philips advance as much as 1.5% after UBS raised the Dutch medical technology firm to neutral, saying “consensus estimates and valuation better reflect the risks ahead”
• Abcam jumped after Panmure Gordon upgraded the biotech company to buy ahead of interim results next week, which the broker expects to generate a “positive reaction” from the market
• Countryside Partnerships shares rise as much as 7.4% after Vistry Group agreed to acquire the UK homebuilder, with analysts noting the cash-and-stock deal makes strategic sense
• European utilities underperformed after Gazprom’s decision to keep the crucial Nord Stream pipeline shut worsened the bloc’s crisis and makes this winter’s outlook gloomier
• European auto stocks slide to the lowest since July 15, as the region’s escalating energy crisis makes rationing look more likely, while Morgan Stanley strategists downgraded the sector to underweight
• Campari and Remy Cointreau shares fall, underperforming in Stoxx 600 Food & Beverage sector, following downgrades of both stocks by Exane BNP Paribas, with Diageo and Fevertree also downgraded
• German stocks on its DAX index benchmark fall the most since mid-June, amid growing recession fears and as the country unveiled a relief package that may cap energy company profits
• Asos shares fall as much as 5.1% after it had its FY23 sales and pretax profit estimates lowered at Peel Hunt, along with a cut to the price target due to macro-economic risks and other concerns
• Corbion shares decline as much as 3.1% after Berenberg further reduced its Street-low price target on the biochemicals firm due to the de-rating of its peers in the polylactic acid business
• Aston Martin shares dropped as much as 8.4% after the carmaker raised GBP575.8m via a 4 for 1 rights issue, with irrevocable committments from PIF, the Yew Tree Consortium and Mercedes-Benz

Earlier in the session, Asian stocks declined, paced by losses in Hong Kong, where tech shares slid as traders weighed the risk of curbs on investment from the US. China reduced the amount of foreign-exchange deposits banks need to set aside as reserves for the second time this year to boost the yuan after the currency hit a two-year low.

Asia-Pac stocks lacked firm direction amid cautiousness ahead of this week’s key events including central bank meetings and tier-1 data releases, while better than expected Chinese Caixin Services PMI is offset by China s COVID-19 lockdowns and ongoing European energy woes. ASX 200 (+0.2%) was just about kept afloat by strength in the commodity-related sectors with outperformance in energy as underlying prices gained following the indefinite shutdown of the Nord Stream 1 pipeline. Nikkei 225 (-0.1%) was subdued alongside disruptions as the region braces for Typhoon Hinnamnor. Hang Seng (-1.4%) and Shanghai Comp. (+0.1%) were mixed with Hong Kong pressured by underperformance in auto and tech stocks, while the mainland was choppy after Chinese Caixin Services PMI topped estimates and following the extension of COVID restrictions in Chengdu and Shenzhen.

The dollar strengthened as commodity-linked currencies joined the euro’s retreat to a two-decade low. The pound was steady as the UK’s Conservative Party named Liz Truss as its leader, clearing her way to become prime minister. Her plan to “turbo-charge” the economy by slashing taxes is already worrying investors amid double-digit inflation.

Cash Treasuries and US stocks are closed because of Labor Day.

Oil surged as a OPEC+ agreed to make an unexpected, if symbolic, oil supply cut for October of 100,000b/d. 

Elsewhere, Bitcoin dropped below the $20,000 level. Gold was little changed.

Monetary authorities including Europe’s central bank are set to keep hiking interest rates this week to fight inflation despite the darkening global economic outlook due to risks such as power shortages.

* * *

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks mostly lacked firm direction amid cautiousness ahead of this week’s key events including central bank
meetings and tier-1 data releases, while better than expected Chinese Caixin Services PMI is offset by China’s COVID-
19 lockdowns and ongoing European energy woes. ASX 200 (+0.2%) was just about kept afloat by strength in the
commodity-related sectors with outperformance in energy as underlying prices gained following the indefinite shutdown
of the Nord Stream 1 pipeline. Nikkei 225 (-0.1%) was subdued alongside disruptions as the region braces for Typhoon
Hinnamnor. Hang Seng (-1.4%) and Shanghai Comp. (+0.1%) were mixed with Hong Kong pressured by
underperformance in auto and tech stocks, while the mainland was choppy after Chinese Caixin Services PMI topped
estimates and following the extension of COVID restrictions in Chengdu and Shenzhen

European stocks drifted lower, with Germany announcing it would spend EUR 65bln on its third package which aims to tackle the effects of inflation on consumers and businesses, according to a government document cited by Reuters. It was also reported that Germany is to levy a windfall tax on energy groups to fund the aid package, according to FT. Volkswagen (VOW3 GY) – Porsche will be holding a board meeting on Monday to discuss the IPO. Uniper (UN01 GY)/ Siemens Energy (ENR GY) – Gazprom said the transport of gas to the Nord Stream pipeline has been completely halted until faults are rectified, no timeline for fixing turbine nor restart of gas supply; during routine maintenance works oil leakage was detected. (Newswires)

DB’s Jim Reid concludes the overnight wrap

I’m still recovering from seeing an 18-foot Burmese Python wrapped around my twins at their 5th birthday party yesterday. They wouldn’t go near the Lizzie the crocodile or even the bearded dragon. I joked to my wife that I thought she was the oldest person at the party until the ancient tortoise came out! She wasn’t amused.

Recovery from such an event would normally be helped by the week after payrolls tending to be quieter for data, as well as today being US Labor Day and a closed market Stateside. However, the week in Europe could get off to a slightly fraught start after news just after the European trading close on Friday that Nord Stream 1 would remain shut due to a “leak” after the three-day maintenance period. It had looked earlier in the day that it would reopen this past weekend, but the late news was thought by some to be signs that Russia was using its full leverage over Europe. It could have been related to the G7 finance ministers’ decision to implement price caps on Russian oil a few hours earlier.

Europe has done a very good job over the last couple of months, relative to expectations, in getting gas storage levels high and increasing imports from elsewhere, but if no more gas flows from Russia we are likely touch and go in terms of getting through the winter without notable restrictions/rationing. Russia will be aware of this. Indeed, in this job there is now something else we may have to pretend we’re experts on. Epidemiology was a recent example and now we’ll have to add meteorology to that list as the weather in Europe this winter could be a swing factor as to whether compulsory gas rationing has to be implemented. The good news is that the start of the winter heating season in October looks mild at the moment. However all I would say is I played golf on Saturday and didn’t take my waterproofs as the forecast gave less than 5% chance of rain. Halfway round there was the biggest downpour I have seen for some time and I got absolutely soaked.

So all eyes on gas futures this morning and the aftermath to the NS1 news. European stock futures are around -3% lower in Asia so that has set the tone for the open. This Friday EU energy ministers meet so that will be a key meeting. Expect to see more government action over the next few days and weeks. Indeed Germany yesterday announced a fresh $65bn package to help consumers. This is now the third such package.

Elsewhere the new UK PM will be announced today with Liz Truss being the overwhelming favourite. Her reaction to the energy/cost of living crisis will be very much in focus, especially as it pertains to fiscal policy. This might come out more over weeks than days (emergency budget speculated for September 21st) but could signal a meaningful shift in policy.

All this has slightly overshadowed a big week for central banks with all eyes on the ECB meeting on Thursday, as well as Fed Chair Powell’s speech the same day. On Wednesday, we will get the Fed’s Beige Book and a likely 75bps hike from the BoC. For the ECB our economists’ preview here lays out the case for a 75bps hike following last week’s higher than expected flash CPI print for the region and an array of hawkish ECB comments of late from ECB officials.

In terms of data the US services ISM (tomorrow) will be a highlight given that last month saw a surprisingly strong (to the market) 56.7 print. 55.2 is expected this month which would remain way above normal recessionary levels. In Europe Industrial production for Germany (Wednesday) and France (Friday) might be the highlights given recent energy travails. By contrast, Asia will have a busier week. China’s CPI and PPI (Friday) will be the key data release. Current median estimates on Bloomberg point to a slight YoY uptick in the CPI (2.8% vs 2.7% in July) and easing PPI pressures (3.2% vs 4.2%). This price data will be preceded by trade balance figures on Wednesday. We’ve already seen the Caixin services PMI this morning which came in at 55.0 for August (v/s 54.0 expected), recording the second highest level since May 2021 despite softening from July’s 55.5.

Staying in Asia, equity markets have started the week on a negative footing amid growing fears about an energy crisis in Europe, Chinese Covid lockdowns and geopolitical tensions. The Hang Seng (-1.66%) is the largest underperformer across the region with the Kospi (-0.25%) and the Nikkei (-0.14%) also slipping in early trade. Mainland Chinese stocks are mixed with the CSI 300 (-0.56%) edging lower while the Shanghai Composite (+0.06%) is struggling for direction this morning.

We also got Japan’s latest services PMI data with the index dropping to 49.5 in August, lower than 50.3 in July, marking the first contraction in services since March. Elsewhere, the final estimate of Australia’s S&P Global services PMI came in at 50.2 in August, dropping from July’s 50.9.

Over the weekend, Shenzhen shut down its city center with Chengdu extending lockdown curbs for most parts of the city as the nation is facing a steady rise in Covid infections just weeks ahead of a high-profile Communist Party congress.

On the inflation front, amid the heightened volatility in crude futures of late and recent comments from Saudi Arabia officials, today’s OPEC+ meeting will be in focus to gauge whether the cartel believes supply adjustments are needed to support prices. As I type, Brent futures (+1.85%) are trading higher at $94.74/bbl with WTI futures up +1.83% at $88.46/bbl. The full day by day week ahead is at the end as usual.

Recapping last week, it was a difficult one for markets as investors grew increasingly concerned about the risks to global growth. In particular as discussed above the news at the end of the European session on Friday, that the Nord Stream gas pipeline from Russia would remain closed after its 3-day maintenance period, saw a late sell-off which will have implications for this week. All in all, that meant global equities lost ground for a 3rd consecutive week, with the S&P 500 down -3.29% (-1.07% Friday), and the STOXX 600 down -2.38% (+2.04% Friday before NS 1 news). Tech stocks underperformed, with the NASDAQ shedding -4.21% (-1.31% Friday), and the FANG+ index down -4.61% (-1.91% Friday). However, banks did somewhat better thanks to the more hawkish rhetoric from central banks and higher sovereign bond yields, with the STOXX Banks index in Europe up +3.25% (+3.12% Friday).

Ahead of the gas pipeline news, there had actually been signs of a recovery in markets following the post-Jackson Hole selloff. That was given momentum from the US jobs report for August, which was just about weak enough that it led investors to dial back slightly their expectations for another 75bps hike from the Fed this month but without destroying the growth narrative. In terms of the details, the headline nonfarm payrolls number was broadly in line with expectations at +315k (vs. +298k expected), but the two previous months saw downward revisions of -107k. The unemployment rate also ticked up to 3.7% (vs. 3.5% expected), although that was driven by a rise in labour force participation to 62.4% (vs. 62.2% expected) as more people came back into the workforce. This will be a small amount of good news for the Fed. Fed funds futures reduced the hike expected this month by -3.7bps on Friday to 63.9bps, so nearly at the mid-point again between 50 and 75bps

The more dovish implications of the jobs report still weren’t enough to prevent sovereign bonds from losing ground for a 5th consecutive week, with 10yr Treasury yields up by +14.9bps (-6.4bps Friday), and 10yr bund yields up by +13.6bps (-3.6bps Friday). That came as expectations ratcheted up that the ECB would hike by 75bps at their meeting on Thursday, not least following the stronger than expected flash CPI print from the Euro Area earlier in the week, which hit a record +9.1%. Commodities were another asset class to struggle, which wasn’t helped either by the latest Covid lockdowns in China that have raised questions about the strength of global demand. Against that backdrop, Brent crude oil prices fell -7.89% (+0.71% Friday) to $93.02/bbl, and the industrial bellwether of copper fell -7.45% (+0.21% Friday).

 

Authored by Charles Kennedy via OilPrice.com,

Czech Prime Minister Petr Fiala is blaming pro-Russian forces for mass demonstrations this weekend that saw tens of thousands of people protest against the government, the European Union and NATO amid soaring energy prices and inflation. 

The “Czechia First” demonstration saw 70,000 people gather to protest the government in a development the Czech prime minister is blaming on elements influenced by Russian propaganda. 

“It is clear that Russian propaganda and disinformation campaigns repeatedly appear on our territory and that someone is simply succumbing to them,” Fiala said, as reported by Euractiv.

Protesters, brought together by the Communist Party, the Freedom party, the Direct Democratic Party, and other groups labeled as “radical”–both far-left and far-right–called on the government to address soaring energy prices and the highest cost of living since the early 1990s for everything from housing to consumer goods. 

Smells like everybody is pissed off by NATO.
◾In Prague, 50 thousand people came to a rally: they demand that the authorities take a neutral position on the conflict in Ukraine

◾The rally that is taking place at these minutes is called “The Czech Republic first of all.” pic.twitter.com/q9xF6Dm0bR

— yugo antifascist ☭ 🚩komintern affiliated media. (@AntifaYugo) September 3, 2022

Protesters called for a new deal with Russia for gas supplies, just a day after Moscow said natural gas flows through Nord Stream 1 to Europe that had been cut off for maintenance would not be restored on Saturday as scheduled, and would be delayed indefinitely. 

Inflation has hit 17% and is marching towards 20% in the coming months, according to Fortune, citing the Czech central bank.

The mass protests also came a day after a no-confidence vote against the five-party coalition government failed. 

While the prime minister blamed Russian influence, other coalition government officials warned against sidelining real economic issues facing the people.

News reports noted that some demonstrators donned T-shirts favoring Russian President Vladimir Putin and some carried anti-EU and anti-NATO posters.

Social unrest has been on the rise in Europe since Russia invaded Ukraine, with Western sanctions and soaring energy prices creating a toxic mix along with an influx of Ukrainian refugees. Tensions are rising ahead of a winter that is expected to see a worsening of the energy crisis. 

After a drawn-out contest, the country’s ruling Conservative Party on Monday picked Liz Truss to be its new leader and the U.K.’s new prime minister.

Truss, until now the U.K.’s foreign minister, beat rival Rishi Sunak, the country’s former finance minister, to win the leadership race. With members of the Conservative Party asked to vote for their favorite candidate over the last few weeks, 81,326 members voted for Truss while 60,399 members voted for Sunak. Turnout was 82.6%

Truss does not automatically become prime minister on Monday as ritual dictates that the outgoing prime minister (in this case Boris Johnson) first has to tender his resignation to Queen Elizabeth II, who then appoints Truss.

Truss, a free-market Tory, was elected as an MP in 2010 and has served in the cabinets of David Cameron, Theresa May and Boris Johnson. She will become the fourth Tory prime minister in little more than six years.

The 47-year-old incoming premier has promised a rightwing agenda of tax cuts – largely funded by borrowing – in an attempt to halt Britain sliding into a lengthy recession.

But, as Bill Blain warns this morning At MorningPorridge.com, the new UK Premier has 5 days – tops – to establish her new government and put in place the strategies and policies to restore confidence in the UK economy. If not, the Virtuous Sovereign Trinity will fracture. It needs sound communication and clear grasp of the problems behind the crisis. Truss hasn’t demonstrated either – yet.

New UK premier Lis Truss has, at most, 5 days to deliver a confidence turnaround in the UK economy. She has promised to deliver a plan – and we are all desperate to hear what it is. Expectations are not high.

It is not the Morning Porridge’s aim to comment directly on politics, but on how politics are likely to shift and nudge markets. It’s not my role to comment on the efficacy of policy proposals, like the ones she is apparently set to announce, but on whether the market will be convinced they are good and effective for the UK.

Simply put: If Truss fails to deliver a coherent strategy for the economy in the next few days – the UK risks an even steeper decline in sterling, an unravelling Gilts market (UK Government Bonds) and the undermining of the third leg of the Virtuous Sovereign Trinity; the political and economic strength that’s underlain the UK’s hard and soft power since the 17th Century.

The signs are not good. I suspect her goodie bag is empty.

Truss is not a communicator. Neither was Thatcher. Truss is not Thatcher.

Truss has refused to be interviewed one-on-one through the latter stages of the Tory leadership campaign. She finally had to face the music yesterday on the new Laura Kuenssberg BBC Sunday Morning Brekdrek Sunday Politics vehicle yesterday.

Truss presented herself as an heir to Margaret Thatcher, promising tax cuts and less regulation, insisting it was wrong to see all economic policy through “the lens of redistribution”.

Liz Truss says “it’s fair” that the richest people will benefit the most from her tax cuts.

“To look at everything through the lens of redistribution, I believe is wrong.” pic.twitter.com/pt2kC8qa2n

— Ava-Santina (@AvaSantina) September 4, 2022

I have watched pine logs after a personality by-pass come out a difficult interview in better shape.

It was a train-wreck – she answered nothing. She looked tired and haggered. She was a rabbit caught in the headlights, which is not a good look ahead of the most difficult and critical week in UK politics.

One of Kuenssberg’s panel, comedian Joe Lycett – self-identified fanatical Right Wing supporter (ahem..) – was very supportive: Lycett “praised” Truss for her “clarity”. He added: ‘I think the haters will say that we’ve had 12 years of the Tories and that we’re sort of at the dregs of what they’ve got available and that Liz Truss is the backwash of the available MPs. I wouldn’t say that because I’m incredibly right wing, but some people might say that.”

Convincing sceptical markets the UK economy is in fine shape is going to require a gifted and trusted communicator. Yesterday, Rishi Sunak – the losing contender for the job – demonstrated he had it: an appealing mix of smarts and chutzpah to deliver the message. But, looking at the scale of the crisis and the impossibility of herding the fraxiously-riven Tory Party to deliver, Sunak must be delighted to have lost.

This morning, Truss’ Chancellor in Waiting, Kwasi Kwarteng gets the front page of the FT to explain what she was supposed to say yesterday: A Liz Truss Government would be unashamedly pro-growth.

As you would expect from a well-educated member of the Eton/Oxford Chumocracy, Kwarteng writes well and fluidly – explaining carefully the first challenge of helping households and businesses through the energy and inflationary price shocks brought on by “Putin’s War” in Ukraine. They will also address the second challenge of long-term issues, like taking “responsibility for the health and wealth of the economy and country”… which pretty much defines what we all expect our government to do… anyway.

Kwarteng will be the next Chancellor of the UK – the man pulling the purse strings, funding policies, and directing the spending on recovery. In his FT note this morning he lays out the bones of this plan to create confidence in the UK economy:

• Fiscal loosening to support “people” through the winter – which I assume not only means helping people to survive the cold, but also bringing down the massive fuel bills threatening to close businesses across the UK? (Not much point surviving winter if there are no jobs left.)

• Rowing back on Truss’s comments undermining the Bank of England’s independence – by confirming it will remain free. (Andrew Bailey resigning now would have strangled this new government’s credibility at birth. I hear it may have been on the cards unless a commitment was given. I guess he will stay now.)

• Sound public finances and a strong economy. (No Sh*t Sherlock)

• Pro-growth – conditions for investment and innovation to flourish. (NSS)

• Unlocking investment and growth, rather than how we tax and spend. (NSS + Deflection)

• Reversing stagnation and anaemic growth by improving productivity. (NSS)

• Being decisive and doing things differently. (Really… how refreshing.)

• Targeting 2.5% growth trend. (Achievable.)

• No mention of Brexit anywhere.

Etc, etc, etc… Sound bites are no substitute for action.

For readers unfamiliar with Mr Kwarteng, the UK business secretary was assuring us that high gas prices in 2021 were not a problem. After earlier overseeing the closure of the Rough gas storage facility (which he is now desperately rushing to reopen), and that the UK could access gas on global markets at better prices, he assured us that: “Energy security is an absolute priority” last year… So, how did that play out Kwasi?

I am not sure if Mr Kwarteng is aware, but his party have been in power since 2010, the effective end of the 2008 Global Financial Crisis, and the beginning of the strongest stock market boom in history – largely fuelled by Zero Interest Rate Policy and Quantitative Easing. Over the 12 years since, the Conservative party has delivered us an economy when the productivity gains he blithely expects to generate have been… 0.4% per annum. Not a staggering success after more than a decade in power.

I am delighted to note that Mr Kwarteng has spotted the importance of productivity. Is he aware of how to generate improvements? I doubt it. The default Tory perspective is its feckless lazy workers not working hard enough… pay them less and they will work harder. That’s a dunderhead approach – it’s management who need to lead and provide the wherewithal in terms of plant, machinery, stimulus, incentives and conditions to improve productivity. It can be done – take a look at cooperative Scandinavian economies.

Truss (a former member of the Hayek Society) has surrounded herself with a curious pack of economic advisors, including Patrick Minford (Thatcher’s favourite monetarist) as her economic guru. His basic prescription for the economy is to borrow more to fund tax cuts on the basis it will boost business.

Have the Conservatives actually been looking at the UK economy these last 12 years? The effect of ultra-loose monetary conditions, and the great fiscal giveaways during the pandemic, was not primarily to create economic growth, innovation, new plant and new jobs, but to focus management on maximising their returns from the financial asset market – it being better to do things like stock buybacks (with the incidental higher bonuses to management), than invest in growth and productivity. Let corporates pay less tax, and there is no guarantee it will flow to new jobs and productivity – more likely into the pockets of the owners and managers to invest in financial assets.

But such is the basis of the Truss plan. The plan such as it is.. Let’s wait and hear the details.

Around the globe investors will be looking at the new Truss government and making decisions about what it means for investment in the UK. Truss and her Chancellor can make all the noise they can about how it’s a great time to invest in the UK, but the reality is not what they say… it’s what investors conclude from what they hear and see.

Maybe I am guilty of high treason for being suspicious there is no real plan – just a series of hashed up compromises between the factions of the Conservative Party that got Truss her new job. The Brexiteers will be demanding greater Brexit, the debt-doubters will be demanding she reigns back on spending, the feee-marketeers will be demand tax-cuts for businesses, and a clamp down on wage-demands in the face of the inflation shock. The workers will be blamed, and nothing will get done.

Unless I am very much mistaken, Sterling is going to end the week an awful lot lower, and Gilts will be yielding more.