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Weekend Summary

ECB on rate cuts for next year, EV subsidy stops for Germany, Israel and Hamas open to a ceasefire, funding drying up for Ukraine, and the week ahead.

Most of the news of the weekend is geo-political rather than economic, though we did see a couple of items out of Europe that are worth a mention…

The ECB have tried once again to knock markets into touch over when and how quickly rates will fall next year. Monetary policy makers have said that they want to see how the data print over the next few months until their March meeting before working out how dovish they want to go, which will make a rate cut at June’s meeting the earliest possible date for a cut. This comes as markets interpreted last week’s central bank meetings as green lights to assume that rates are on the way down and money then poured into stocks, out of the dollar and other risk assets. The likelihood is that even with this renewed vigour and sense of relief in markets that inflation will keep drifting down, as base effects will continue to manifest and energy prices/reserves on the continent remain in good shape.

Germany has had to make a controversial move to stop its electric vehicle subsidy as of today.

The decision comes as parliament on Wednesday managed to approve their 2024 budget but have brought back a degree of austerity and (possibly over) prudent economics that means they are back to strict borrowing rules – which wasn’t going to be a particular issue as the government had planned to spend unused pandemic recovery debt, but the German Constitutional court ruled that unlawful. The EV subsidy scheme had run since 2016 and was meant to run until at least the end of next year. The move won’t be popular with the German auto industry, which is already suffering from high energy and input costs, as they were enjoying relatively strong domestic demand for EV’s having lost some market share to Tesla and Chinese EV manufacturers. Other budget initiatives that were planned, such as upgrading the state railway will now be achieved through partial privatisation. The German public can also expect increases in surcharges for fuel oil and gas as well as extra levies on domestic flights. Reuters has more, click here to read.

In the Geo-Political Space

Egypt says that both Israel and Hamas are both open to a ceasefire but can’t agree on how it would be executed. Apparently, the discussion is hinging on Hamas wanting to unilaterally decide which hostages it will release, but Israel not agreeing to the time or duration of a ceasefire until it has seen that list. Meanwhile Egypt have said that the Kerem Shalom border crossing is open but that aid isn’t getting through because it was being delayed by inspections. As a ceasefire seems more hopeful, the question now turns to how a medium-term situation is managed, but Netanyahu has once again reiterated that he will not allow the Palestinian Authority to take control, despite that being what Washington wants.

In Ukraine

There’s growing concern that EU and US funding is going to dry up, which could lead to Russia claiming an outright victory as early as next summer, according to CNN. Last week we saw Putin give his annual TV question time, which he cancelled last year, but this year he spent hours answering a well-choreographed list of viewer questions, feeling emboldened by press around disagreements within the US and EU over future support.

Not wanting to be left out, North Korea fired a long-range ballistic missile into the sea yesterday, saying that the US and South Korea had provoked them. South Korean diplomats met in Washington over the weekend and agreed to include nuclear operation scenarios into their combined military drills next summer. According to Japan, the missile would have a range of up to 15,000km depending on what its payload was, meaning it could reach anywhere within the US.

Looking to the Week Ahead

There are only a few data points of note, European inflation tomorrow (again, noting that the ECB really want markets to believe that rates will remain high for long, this could be a market mover if it comes in lower than forecast) UK public Sector Borrowing figures might give the government further relief if we’ve borrowed less than forecast in November. UK retail sales on Friday morning will be interesting too – and likely prompt a run for the door immediately thereafter, as that’s about it for the year! Trading desks will start to thin out as the week goes on and algorithms will likely be adjusted to account for reduced liquidity, this could promote some spikier moves in markets if we do get any economic or political curveballs thrown over the break.

Have a great week.

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