October 14, 2022

“Reports on the UK Government’s fiscal policy U-turn saw Gilt yields fall sharply yesterday and provided some support for sterling. Meanwhile, the dollar rally continued as hopes of Fed pivot faded as US core inflation rose to 40-year high. Later today, US retail sales for September and consumer price for October are due.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The United States dismissed the Saudi Arabia’s defence of OPEC+ decision to slash oil supply yesterday. After the oil producer group’s decision last week to slash 2 million barrels a day from its output quotas, the US said OPEC+ had “aligned with Russia”, Riyadh’s ally in the cartel. In a detailed defence of the OPEC+ move, the Saudi Foreign Ministry said that the decision to cut oil supply was taken unanimously by all member states of the OPEC+ group and that the cuts had been decided purely on economic basis. US National Security Council spokesman John Kirby said: “We presented Saudi Arabia with analysis to show that there was no market basis to cut production targets, and that they could easily wait for the next OPEC meeting to see how things developed.”

Royal Mail will consult on up to 6,000 redundancies as the delivery giant blamed industrial action for mammoth financial losses. The firm said the move is in response to the “impact of industrial action, delays in delivering agreed productivity improvements and lower parcel volumes”. Meanwhile, the waiting list for hospital treatment has hit a record high of seven million in England, latest figures show. Hospitals are carrying out 12% fewer operations and treatments than they were before the pandemic. Surgeons said it was really frustrating as operating theatres were not being used due to a lack of beds and staff. They say it is not unusual to find surgery cancelled at the last minute as staff are unavailable or intensive care and ward beds are full with other patients.

GBP

Sterling is weaker than most major currencies in the early morning trade. Investors piled cash into sterling money-market funds at more than three times their usual rate during the recent turbulence in British bond markets, and pension funds likely made up the bulk of those inflows, Fitch Ratings said today. The government’s “mini-Budget” on Sept. 23 triggered some of the biggest ever jumps in UK government bond yields, spooked wider markets and triggered a crisis among pension funds needing to find cash. Money market funds typically invest in high quality assets over a shorter-term horizon than other asset managers and, as such, are perceived to carry lower risk. Fitch warned that if the volatility in British gilts persisted or intensified, “liquidity pressure” could spread beyond pension funds.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. France has sent gas to Germany for the first time in “European solidarity” amid increasing energy pressures. The gas, delivered via a pipeline, is part of a deal between the countries to ease energy shortfalls after Russian turned off the taps to Europe. Though the new flow is less than 2% of Germany’s daily needs, it is welcome as Berlin battles to diversify its energy. Meanwhile, Serbia must adapt to European Union visa policy if it wants to join the bloc, Germany’s interior minister said in Luxembourg today. Serbia’s visa-free policy with countries like India and Tunisia has been criticised for allowing an influx of migrants who can then try and enter the EU.

USD

The dollar is well bid against most major currencies overnight. Inflation is spreading deeper into the US economy, slamming the door on hopes the Federal Reserve will dial back interest-rate hikes that threaten to tip the country and perhaps the world into recession. While the annual pace changed slightly at 8.2 percent, the index showed another worrying jump on a monthly basis, indicating that core inflationary pressures are still accelerating. Excluding volatile items such as food and energy, the “core” CPI measure rose 6.6 percent compared to the same period last year. The larger-than-expected increase leaves the Federal Reserve with little choice but to move forward with its fourth consecutive increase of 0.75 percentage points at its next policy meeting in early November.

Markets

Europe’s STOXX 600 climbed this morning amid hopes of a reversal in some fiscal steps announced by the British government, with investors buying beaten-down names despite worries around economic growth and its impact on corporate earnings. The region-wide STOXX 600 index was up 1.8%, hitting its highest level since October 7. Shares in the region took cues from a positive finish on Wall Street overnight. US stocks closed more than 2% higher amid technical support and short-covering, even after a red-hot consumer price index report bolstered the case for a fourth straight 75 basis point rate hike from the Federal Reserve next month. London’s FTSE 100 index and midcap FTSE 250 index gained 1.4% and 1.7%, respectively.

Main Economic Data/Central Banks/Government (All times CET)

8:45 a.m.: France Sept. CPI
9:00 a.m.: Spain Sept. CPI
9:00 a.m.: Riksbank’s Ohlsson speaks
10:00 a.m.: Poland Sept. CPI
10:00 a.m.: ECB’s Holzmann speaks
1:00 p.m.: BOE Quarterly Bulletin
2:30 p.m.: US Sept. retail sales, import price index
4:00 p.m.: US Oct. consumer sentiment
BOE ends emergency gilt purchases

Corporate Events

Earnings include UnitedHealth, Wells Fargo, JPMorgan, Morgan Stanley, Citi, PNC, US Bancorp

To learn more about Ballinger & Co., please visit our website or our LinkedIn page.