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Weekend Summary

Oil prices soften, potential for an extended European energy price cap, election results from the weekend, and looking at the week ahead.

Oil prices have softened this morning, as the situation in Israel/Gaza hasn’t materially escalated over the weekend. Though there’s been no escalation, there’s been no real steps towards resolution either, with the US and other allied countries calling for delays to a ground invasion in the hopes that more hostages can be released and that escalation within Gaza also increases the risk of “significant escalation” in the region, according to American officials. The Times has more, click here to read.

Europe is pondering the idea of extending their energy price cap to cover this winter. The price cap was a reaction to last winter’s crazy energy prices, where at some points gas prices spiked to €300 per megawatt hour, which is six times higher than they are currently. The cap kicks in if Europe sees gas prices breach €180MWh for three consecutive days and means, at the point it were to kick in, that orders on the TTF exchange above that price would not be

accepted – though the cap was never tested following this implementation, so its hard to know in practice what would actually happen to gas prices, or businesses that need to pay for fuel if that were to kick in. Europe has done well over the summer months to get its gas storage levels to record highs, but with concern that escalating conflict in the Middle East could cause prices to spiral and subsea gas pipelines in European waters could be targets of sabotage, many feel like there’s no point retiring a backup plan that might prove invaluable down the line. As well as energy price caps, France and Germany are said to be pushing the European Commission to extend the state aid rules that allowed governments to subsidise consumer energy bills last winter, but which are also due to expire on the 31 December. This isn’t a universally welcomed approach though, with the Netherlands, Estonia and Finland all objecting to the idea that subsidies should be allowed to continue. The FT has more, click here to read.

Staying in Europe

Some of the largest fund managers on the continent think that the ECB haven’t yet reached peak interest rates, according to Bloomberg. They say that increasing energy prices could lead to the central bank having to act aggressively again to try and curb inflation, but that in doing so they would leave governments in a tricky position as this would increase the cost of borrowing, which would in turn make it harder to spend. In slightly related news, Greece’s credit rating has been returned to investment grade after a decade in ‘junk’ status. Athens is now the proud owner of a BBB-rating with a stable outlook, just one notch below Italy at BBB (which is only for context, and no way praise of Italy’s rating which is just two steps off junk status).

Weekend elections

There have been a couple of elections to talk about from the weekend: Argentina went to the polls and unexpectedly saw left-wing candidate Sergio Massa pick up the largest share of the vote. This confounded pollsters who had thought the far-right candidate Javier Milei would fare best. Argentina is still in the grips of inflation above 100% per annum and economic growth at minus three percent, so given that Mr Massa is the current economy minister, you can understand the surprise that he has performed so strongly. This vote will now go to a run-off between the two candidates in the middle of November.

Swiss elections at the weekend have seen the country move to the right, with one of the strongest performances of the Swiss People’s Party (SVP), resulting in them picking up 29% of the vote. The SVP campaigned hard on immigration, promising to stop the Swiss population exceeding 10 million, currently at 8.7m. They also strongly oppose sanctions on Russia, which they say have led to much higher energy prices and gone against the strongest Swiss tradition of political neutrality. The victory by them is a huge shift in percentage terms, but because of the way the Swiss executive works, it may not translate to any meaningful gain in power, as the seven-person executive is made up of a 2-2-2-1-person power share of the four biggest parties meaning that despite getting 29% of the vote they won’t get materially any more power. Switzerland has a tendency to settle its big political questions by national referendum and this is where such a big swing in public sentiment from left to right might begin to manifest itself.

In the US there’s political stagnation as the House is now in its third week without a Speaker. The problem seems to be getting further from resolution rather than closer as now nine Republicans will put themselves forward for the job, meaning even less unity. The real-world implications of this are severe though, as there are funding applications for Ukraine and Israel awaiting approval and the debt ceiling limit will be hit again next month – all of which, under the normal course of duty would be resolved by the House rather than the Senate.

Looking ahead, it’s a busy-ish economic data week, but this is likely to play a distant second to geo-politics in terms of what’s moving the market. If we had to pick the data highlights, we’d go for UK unemployment numbers and UK/European services PMI data, all of which comes out tomorrow.

Have a great week.

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