I trust you had a good weekend!
The cost of gas is continuing to cause casualties amongst UK energy suppliers, with the risk that another four may go under this week. The increasing costs, which cannot be immediately and fully passed onto consumers, mean that companies are spending significantly more securing their energy than they are receiving from their customer base and these smaller firms just don’t have the balance sheets to be able to ride the losses. This has caused the government to act and Kwasi Kwarteng is going to meet with the CEO’s of larger companies, who are expected to absorb the customers of any failed businesses, this morning. These companies would normally jump at the chance of receiving a few hundred thousand customers, but because of the situation it would just exacerbate their own problems and increase their losses; as such the government will talk to them about the possibility of creating a ‘bad bank’ of sorts, where the regulator puts these failed companies’ customers and runs them independently for the time being, in a not dissimilar way to how Northern Rock was handled when that blew up in 2008.
Gas prices are also hitting industry and the ripple effects are going to be felt by consumers in the coming weeks, particularly as we are facing a shortage of carbon dioxide, which is used heavily in the meat processing industry. CO2 is a major by-product of fertiliser production, but the UK’s two largest fertiliser plants have been shut down whilst gas prices are so high, which means that they’re not producing CO2, which is leading to supply shortages and the real risk that production will have to be halted and that supermarket shelves might become more sparse. This is another area that the government might feel they have to step in on, as there’s nothing like empty shelves to remind people that things aren’t going to plan. This has happened before but last time it was a very UK specific problem and the French came to our rescue. This time round it’s a more global issue and as such we might struggle to just import what we need.
Our last point on the increasing costs of energy is that this won’t have been in the Bank of England’s inflation forecasts last time around and the risk that these increases stay around for a while is very real and as such is going to add some upward price pressure and also duration to inflation, which is supposed to be transitory. The Bank of England meet this week to discuss monetary policy and the subsequent statement will probably be the most interesting they’ll have made for a while, as there will be no ignoring the problem of energy prices and if they try and explain them away as temporary, then investors will be looking for how they justify that claim.
The Bank of England will be loathed to use the term, but ‘stagflation’ is a word that’s doing the rounds at the moment. The term is a combination of ‘stagnant economy’ and ‘rising inflation’ which is a difficult situation to find your way out of; the normal response to rising inflation is to increase interest rates, but in doing so you tend to slow down the economy – and if you’ve got a stagnating economy, you’d normally cut interest rates, but in doing so you increase inflation. A real catch 22. The term isn’t just being bandied around in the UK, as there is also concern from the US and elsewhere that the covid recovery is slowing down but that the transitory inflation numbers haven’t yet gone away. The UK does face a bit of a compounding effect compared to other nations though, because we are seeing that the covid recovery is well underway, but the post-Brexit recovery isn’t. Supply shocks from Brexit are going to take longer to go away and this in turn could lead us deeper into this problem than other countries and therefore struggling to get out of it for longer. The Times has an interesting article on the subject.
On Wednesday, we are privileged enough to have a press conference from the Federal Reserve regarding their stimulus program. This is a fairly major announcement, as it has been clear for some time, that Fed Chair Powell has been making a concerted effort to let everyone know that they are not going to par back stimulus yet… but they are going to do it… but not yet… but it will happen… eventually… perhaps. This is predominantly down to two factors, the obvious one is that the US is not quite in a place to start removing the support, and the second, is there is a real risk of another taper tantrum, which the US suffered in 2013, where they shocked the market by announcing the removal of QE, which resulted in soaring bond prices, which is why Powell is trying to feather the information in. He is in a tough bind though, on one hand he needs to get this done, and on the other, he has to try his level best to convince the market that while things are improving enough to begin withdrawing some of the stimulus package, things have not improved enough to start hiking interest rates, a tricky balancing act, least of all because he is under the watchful eye of Joe Biden, who is deciding whether or not to reappoint him for another four years The statement begins at 7:30pm GMT, and will most likely intimate scaling down monthly bond purchases, however the markets will be watching closely, as this will be a key driver over where USD goes over the coming months.
A story which is developing rapidly, is that China’s Evergrande Group is likely to default, causing panic amongst investors. To give this story some colour, Evergrande’s liabilities involve 128 banks, and 121 non-banking institutions. Because of the magnitude of this default, the risk of contagion is extremely high, which is likely to reverberate globally. The offshore yuan lost around 0.7% over Thursday and Friday, however a stronger Dollar can take some responsibility for this. The yuan is about to be thrown into the spotlight, as financial markets brace themselves. To put this into perspective, the People’s Bank of China added $14 billion of funds on a net basis, the most since February, in order to avoid any liquidity squeeze. Could this situation become anymore convoluted? Yes. China are in the middle of a series of staggered holidays, which mean that the true extent of this situation won’t truly be evident while the markets are closed on Monday and Tuesday, on Wednesday onshore markets resume trading, while Hong Kong goes on holiday. Evergrande are due to pay around $84m of dollar-bond interest on Thursday 23rd, and it is unclear whether or not they will meet that deadline, so we wait with bated breath until then.
Angela Merkel is finally stepping down after 16 years in power as the German Chancellor, having had a considerable impact in shaping Germany, and Europe’s future. This is worth keeping an eye out for, as on 26th September, one of the most unpredictable elections in years is going to take place. In an interesting twist, Germans are turning to The Wahl-O-Mat (Vote-O-Mat) digital survey, which has been designed to strip away all the conjecture and emotion of the candidates, to allow voters to base their decision solely on tangible policy preferences, German efficiency at its best here. This is not a new approach in Germany, in the last elections, the Wahl-O-Mat was used nearly 16 million times, which equates to around one in every four eligible voters, which needless to say, give this platform the sway to swing the election. Although we are unlikely to get a “IT’S THE SUN WOT WON IT”, there is still plenty of time for the voters to be swayed.
Also worth a note, Russian elections were held over the weekend, unsurprisingly, Putin has retained control, despite videos of officials filling in multiple ballot papers. He has allowed some opposition to make inroads, however he can easily negate that closer to the next election in a similar fashion to this one, where multiple opposition members ended up missing or in jail.
Have a great week.