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Morning Update

Macro Monday, Sunak talks of UK elections in July, credit ratings reports in Europe, CNBC article talks of stagflation risk in developed economies, update on the Russia/Ukraine conflict, and what's happening this week.

Good morning,

It’s been a busy weekend from a news perspective, so we’ll attempt a whistle-stop tour rather than a deep dive…


Macro Monday

On this day in 1429, Joan of Arc arrived in Orleans to lead her French forces to victory against the British.

In the UK

Rishi Sunak has not ruled out a July election when he was speaking on the Sunday sofas. The PM wouldn’t be drawn on specifics, but with local elections this Thursday and a high probability of his party getting a pasting, which might in turn lead to the no-confidence letters reaching a critical mass, there is every chance that this could happen. Parliament needs to be dissolved 25 working days before an election, so he’d have plenty of time to announce any time over the next few weeks.

Meanwhile, Keir Starmer has pledged to keep the pensions triple lock for at least the next five years if he were to get into power. The pledge is expensive but will do a lot to reassure voters currently, or soon to be, collecting pensions that he is a safe bet. The over 65’s demographic has proven most loyal to the Conservative party and this is another step in removing wedge issues that might be used by his opposition in the run-up to the election.

Pressure is being applied to the Bank of England to cut rates at their May meeting, which they’re not happy with. The pressure is partly coming from MPs who want the bank to cut rates to help their narrative about getting the economy back on track. The central Bank is operationally independent from the government and there’s frustration that the chancellor, Jeremy Hunt, has repeatedly mentioned the possibility of rate cuts as a feel-good factor for voters. In addition to external pressure, there is an internal divide within the monetary policy committee over whether the timing is right to cut. The next monetary policy announcement is on 9 May.

In Europe

The news has mostly been around credit ratings – where Italy and France managed to retain their ratings at BBB and Aa2, respectively, with stable outlooks.

This is a blessing for both countries who are running budget deficits larger than European rules allow and have no significant economic growth to lean back on, with both expecting around 1%.

The French finance minister has called this an opportunity to step up their efforts to get public finances in order, but we can’t imagine them making any significant interventions in the coming months, for fear of risking protests during the Olympics!

European parliamentary elections are taking place on the 9th of June and political campaigning is really getting underway. Olaf Schulz kicked off his party’s campaign at a rally this weekend and called for an economic turnaround in Germany, because it would help with geopolitical stability.

His three-party coalition has polled poorly recently and there has been a real rise in popularity of the far-right AfD party. Scholz will be concerned that the AfD could fare well in European elections which would cause him headaches on a national governing level.

In the US

There’s an interesting article from CNBC, citing the president of the World Economic Forum. Borge Brende has cautioned that global debt is at levels last seen in the 1820s and that there is a risk of stagflation amongst developed economies.

His concern is that debt is still 9% above pre-pandemic levels, while average annual growth has slowed to 3.2%, well below the historic 4%+ that we were used to in the last decades. The link to the article is here: WEF president: ‘We haven’t seen this kind of debt since the Napoleonic Wars’ (cnbc.com).

Another regional bank has been taken over after regulators stepped in this weekend. Republic First Bancorp in Philadelphia was seized by regional regulators after talks with a group of investors were abandoned.

The regulator swiftly sold the bank to Fulton Financial Corp., but the deal will still cost the FDIC (the insurance company that banks pay into to protect their industry in the event of default) around $660bn. Such a swift transaction will be paraded by the banks as proof that their system works and that lawmakers shouldn’t be increasing banks’ capital requirements, which is something that federal regulators are keen to implement.

Increasing capital buffers may be beneficial to bank stability, but it would harm the amount that banks can lend and therefore slow down the economic juggernaut.

In Russia/Ukraine

Officials in the Kremlin again renewed their calls against the West from utilising frozen Russian assets. This weekend, for instance, the Russian Foreign Ministry spokeswoman Maria Zakharova maintained that Moscow would not exchange any Ukrainian territory seized by Russia in exchange for frozen assets.

This comes as the Indian Express newspaper has cited Dmitry Peskov as saying that there are no grounds for peace talks with Ukraine. It is estimated that there are around $300bn in Russian sovereign assets frozen by the West.

Last month we looked at how the European Commission was considering how Brussels could utilise funds gained from the interest accrued on frozen Russian central bank assets held in accounts across EU member states to arm Ukraine.

This included Ursula von der Leyen saying, “It is time to start a conversation about using the windfall profits of frozen Russian assets to jointly purchase military equipment for Ukraine.”

This weekend, the former Armed Forces minister, James Heappey, also said that a Ukrainian defeat could cost the West trillions. Speaking in The House Magazine, Heappey said that “a stalemate or, heaven forbid, a Ukrainian defeat promises a new cold war that will last for decades and cost trillions of dollars more.”

While Heappey welcomed the additional round of support from the US, EU, and UK, he said that such support was unlikely to “immediately tip the balance”. As such, Heappey considers how any exchange of territory in battle this year will relatively be small with frontlines “stabilising”.

Looking ahead

It’s a pretty busy data week and with volatility creeping back into most asset classes, there’s a reasonable chance of the markets reacting to the data and us seeing some moves. The highlights include a load of PMI data, German inflation, US rate announcement (no rate cut expected, but Chairman Powell speaking after the announcement will be interesting) and US payroll numbers on Friday.

Have a great week.

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