October 3, 2022

“Sterling has now recovered all its losses since Kwasi Kwarteng’s mini-budget sent the currency plunging to record lows last week. Further gain in GBPUSD remains on the cards. Coming up this week, there will be several speeches from central banks officials and the US labour market report on Friday, which will be the main data of focus.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The death toll from Hurricane Ian climbed past 80 yesterday as embattled residents in Florida and the Carolinas faced a recovery expected to cost tens of billions of dollars, and some officials faced criticism over their response to the storm. Florida accounted for all but four of the fatalities, with 42 tallied by the sheriff’s office in coastal Lee County, which bore the brunt of the storm when it made landfall, and 39 other deaths reported by officials in four neighbouring counties. Meanwhile, Cuba is restoring power after Ian knocked out electricity to the whole country of 11 million people, flattened homes, and obliterated agricultural fields.

Prime Minister Liz Truss’s government has abandoned its plan to abolish the 45% top rate of income tax in a humiliating U-turn, following a mounting Conservative revolt over the policy and a turbulent reaction from markets. The Chancellor Kwasi Kwarteng said the decision to cut tax for people on incomes of £150,000 or more “has become a distraction from our overriding mission to tackle the challenges facing our country”. The sudden change of course followed a realisation within Downing Street that so many Conservative MPs objected to the policy that it might be voted down in parliament, amid worries from voters about rising mortgage costs as money markets were spooked by the scale of borrowing.

GBP

Sterling is well bid against most major currencies overnight. The pound has now recovered all its losses since Kwarteng’s mini-budget sent it slumping to record lows a week ago following news of the U-turn on the 45p rate abolition. Kwasi Kwarteng says it has become clear that the plan has been ‘a distraction’ from the government’s mission to tackle the challenges facing the UK. AS the result, the pound may push higher this week, as the damage caused by Kwasi Kwarteng’s mini-budget is unwound.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Europe faces “unprecedented risks” to its natural gas supplies this winter after Russia cut off most pipeline shipments and could wind up competing with Asia for already scarce and expensive liquid gas that comes by ship. The Paris-based International Energy Agency (IEA) said in its quarterly gas report released today that European Union countries would need to reduce use by 13% over the winter in case of a complete Russian cut-off amid the war in Ukraine.

USD

The dollar is weaker than most major currencies in the early morning trade. Eswar Prasad, an economist at Cornell University, said the US won’t take any actions to slow interest-rate increases or otherwise change the dollar’s path until it poses a direct risk to the US economy. So far, the risks to the US are limited—while the benefits are tangible.  The greenback has soared in value as the Federal Reserve raises interest rates to fight the highest US inflation in decades and investors move money into dollar-denominated assets. Fed Vice Chairwoman Lael Brainard in a speech last Friday said the central bank was monitoring global financial developments while remaining committed to reducing inflation by raising rates high enough to slow US economic growth.

Markets

The pan-European Stoxx 600 index dropped 1% in early trade, with financial services stocks shedding 1% to lead losses while oil and gas stocks added 1.3%. The decline in Europe comes after a gloomy trading session in Asia-Pacific markets, with sharp moves in the price of oil. Meanwhile, the S&P 500 was down 1.51% on Friday, falling to 3,585.62. The index closed out its worst month since March 2020. The Dow Jones Industrial Average closed below 29,000 for the first time since November 2020. The index fell 500.10 points, or 1.71%, to 28,725.51. The Nasdaq Composite was 1.51% lower, ending the day at 10,575.62.

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

8:00 a.m.: Russia Sept. S&P Global Manufacturing PMI
8:30 a.m.: Swedbank/Silf Sept. PMI Manufacturing
8:30 a.m.: Switzerland Sept. CPI
8:45 a.m.: France Aug. Budget Balance
9:00 a.m.: Netherlands Sept. S&P Global Manufacturing PMI
9:00 a.m.: Turkey Sept. CPI, S&P Global Manufacturing PMI
9:15 a.m.: Spain Sept. S&P Global Manufacturing PMI
9:45 a.m.: Italy Sept. S&P Global Manufacturing PMI
9:50 a.m.: France Sept. S&P Global Manufacturing PMI
9:55 a.m.: Germany Sept. S&P Global/BME Manufacturing PMI
10:00 a.m.: Euro-area Sept. S&P Global Manufacturing PMI
10:30 a.m.: UK Sept. S&P Global/CIPS Manufacturing PMI
11:30 a.m.: Netherlands to sell bills
12:00 p.m.: Riksbank’s Floden speaks
2:50 p.m.: France to sell bills

Corporate Events

Italy budget balance
The Nobel Prize in Physiology or Medicine is awarded
Euro-area and EU finance ministers meet in Luxembourg through tomorrow

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