Good Morning,

 

UK Energy Costs
Energy costs are front and centre of all the papers this morning. Since yesterday the government has come out and confirmed that the energy price cap will remain and that the consumer is front and centre of their thinking. This therefore means that it will be on the energy providers to manage the situation and the government to provide bailouts, or loan guarantees when they can’t – though there have been no announcements on this yet, despite larger firms reluctance to take on the customers of failed firms. Norway had announced yesterday that they’re to increase export volumes from two terminals ASAP, but we also heard that Russia won’t be increasing their exports and that we’ll in fact see a decrease in their exports in October of around 17%, compared to this month. The government has asserted their confidence in us not having a fuel crisis this winter and that there’s “no question of the lights going out” and that he “does not expect supply emergencies” – and of those two statements, the former sounds more reassuring than the latter. This isn’t just a UK issue; Italy and Spain are preparing multi-billion euro packages to bailout energy firms and insulate consumers from rising prices, with more to follow.

Business secretary Kwasi Kwarteng has also been in regular contact with the CEO of CF Industries, the owner of two fertiliser plants that have been temporarily shuttered because of the gas price rally. He’ll be keen to get these plants back online ASAP and is likely to have to subsidise their activities to make them financially viable. The stocks of CO2 are such that it will only be days before there is a severe shortage, which could mean supermarket shelves becoming more sparsely populated shortly thereafter. The other knock-on effect is that without fertilisers being manufactured now, next years’ crop harvest might be put in jeopardy, which would be a long-term hangover of what is hoped will be a short-lived situation.

 

Stock Market
Stock markets had a bad day of it yesterday, with the prospect of the gas crisis slowing the recovery sharply combined with fears over the possible domino effect of Chinese property developer Evergrande. The company – which is the world’s most indebted company, with more than $300bn owed – is due to make a debt coupon payment on Thursday, which it could well miss and if it does so would be in a default that in turn would impact dozens of syndicated banks and other lenders. The Chinese government is unlikely to step in and save the developer, as there is no state ownership and the chairman took more than $5bn in dividends over the last three years, so clearly isn’t high on the CCP’s list of exemplary companies. Evergrande’s share price is down about 17% so far this week and 85% lower year to date, meaning that their chances of refinancing or rolling this debt at anywhere near commercial terms seem extremely remote. There’s contagion developing across the property market, with another developer, Sinic Holdings, getting a ratings downgrade from S&P to CCC. The knock on for equity markets is that the US had its biggest down day for four months yesterday, whilst Asian bourses that were on holiday yesterday played catch up in this morning’s session and are all down by a couple of percent. We wouldn’t discount the resilience of markets at the moment though and with the amount of easy money in the system there is every chance that investors could see this as a buying opportunity, albeit they might want to wait until later in the week to see what central banks have to say.

 

US Democrats Budget
Some good news could emerge out of the US if the Democrats manage to get their budget over the line. They’ve now included provisions within the budget to suspend the debt ceiling limit until December 2022, which if passed would take the recurring agenda item out of circulation for a while. Some Democrats were dealt a blow yesterday when it was ruled that they couldn’t include a pathway to citizenship for millions of undocumented migrants as part of the budget. There are estimated to be more than eight million “dreamers” in the US who were hoping that they would benefit directly from the budget, though Senate leader Chuck Schumer has said that he is working on other proposals to try and make this happen.
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Canada​​
Across the border, Justin Trudeau managed to secure his third term as PM but didn’t get the outright majority he was hoping for when he called a snap election just tow years into his second term. The election, which cost hundreds of millions of dollars and distracted a lot of people, has ultimately ended with the government being back where they started. Justin Trudeau has chalked this status quo up as a win, by saying “what we’ve seen tonight is millions of Canadians (who) have chosen a progressive plan” – in much the same way that Theresa May said “now let’s get back to work” after her 2017 snap election gamble lost her a working majority.

Transatlantic Travel
Transatlantic flights will be back on the cards from early November after the White House announced their intention to lift their travel bans, though weren’t date specific. The news comes after growing pressure from the UK and EU on the US to reciprocate in the move to allow double vaccinated US citizens to enter their countries. The timing of this is useful, with the UK’s furlough scheme ending in just over a week and the travel sector still being the largest user of the support scheme. Though the wind down of one and the resumption of the other isn’t perfectly timed, the market is already rewarding the news by lifting airline shares, with IAG the parent of British Airways up around 13% yesterday.
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To Close
European markets are quieter so far today and there isn’t too much in the way of economic data that might breach the peace. There is the UN general assembly in New York though and interestingly Brazil’s president Jair Bolsonaro is due to make the opening remarks; there’s an ‘honour system’ in place a this years’ assembly which requires everyone present to attest to being double vaccinated, though even last week Mr Bolsonaro said that he didn’t need to be vaccinated as he has naturally acquired antibodies, so let’s see how this goes down. Subjects of most debate are likely to be climate change and a pledge from Joe Biden to step up the vaccine effort for the rest of the world, with a pledge to get to 70% of the global population vaccinated by this time next year.
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Have a great day.

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