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Tensions Continue to Rise in the Middle East

Travel Tuesday, continued geopolitical tensions in the Middle East, European Council look to unify Europe's capital markets, highest level of UK unemployment since last June, and new sanctions on aluminium cause prices to rise.

Travel Tuesday: Solomon Islands

In 2019, just after the last election, incoming Prime Minister Manasseh Sogavare switched diplomatic ties from Taiwan to China, alarming Washington and Australia.
GDP $1.6 billion
Population 740,000
Biggest Economic Contributors Forestry, Fishing, Tourism
Composition 6 major islands, more than 900 minor islands
Coastline 5,313 km
Next Election 17 April 2024

Tensions Continue to Rise in the Middle East

Headlines continue to be dominated this morning on rising geopolitical tensions in the Middle East as Israel vows to retaliate following Iran’s unprecedented attack on the country over the weekend. At around 1700 yesterday evening, the Israeli War Cabinet finished their meeting to discuss possible options, though it remains unclear what actions they may take.

In the UK, speaking to members of the House of Commons yesterday, the Prime Minister laid out three considerations to foster a “better path” for the region. Firstly, Sunak said that the UK “must ensure Israel’s security” and uphold security more generally in the region by putting pressure on hostile actors. Secondly, the PM said that “we must invest more deeply in the two-state solution, that is what we have been doing over the past six months, including working closely with the Palestinian authority so that when the time comes they can provide more effective governance for Gaza and the West Bank.” Finally, Sunak said that the conflict in Gaza must stop and reiterated his condemnation of Hamas whose attack on 7 October killed 1,139 people including 695 Israeli civilians. Sunak is expected to speak to Benjamin Netanyahu later today.

European Council

European leaders are due to meet this week and there’s undoubtedly a packed agenda for them to get through. One item that has caught our attention though is the bid to rekindle a plan, initially touted in 2015, to unify Europe’s capital markets.

European equity markets are a very disjointed affair, with each country typically having their own stock exchange, with accompanying rules and regulations. This makes institutional capital much harder to come by for companies looking to list and, in turn less liquidity and lower valuations than there is across the Pond.

This has led to the majority of European companies looking to debt rather than equity financing – the opposite to the US – and in turn means that smaller retail investors would prefer to keep money in the bank rather than invest in the market – again, the inverse to the US.

Money in the bank and debt financing may be seen as the safe route, but there’s a disincentive for companies to invest and innovate if the value of their company isn’t directly linked to their share price – where investors typically expect to see a very solid growth trajectory, hence shares trading at a multiple of annual earnings.

The hope of the European council is that they can work out how to unify a single capital market that would attract big names to list, instead of losing out to companies heading to New York to list – which Christine Lagarde estimates amounts to €250bn a year in capital outflows. We like the ambition, but as we’ve seen many times before, enthusiasm can quickly turn to inertia once they get into the details – but with a renewable energy transition and a massive uptick in military expenditure required, having a more functional market would be a welcome asset.

UK Labour Market

The UK unemployment rate rose to its highest level since last June according to the latest data release from the ONS for the month of February. In the latest sign that the labour market may be cooling, the country’s unemployment rate rose 20bps from the last print to 4.2%, exceeding market expectations which were pointing to 4%. This rise in the rate of unemployment equates to another 85,000 people out of work as the total number rose to 1.44 million.

Elsewhere, the UK’s economic inactivity rate rose 30bps to 22.2%, meaning that the number of those either not in work or not looking for a job rose to over 9.4 million. Given that this is a rise of 275,000 people from a year ago, analysts are increasingly focusing on the economic implications of the rising inactivity rate.

Regarding wage growth, average earnings excluding bonuses rose 6% on an annualised basis, coming in slightly below last month’s figure of 6.1%, indicative again of how the heat of the UK labour market may be continuing to ease. When looking at pay including bonuses, the figure came in line with the previous print and marginally above the general market consensus.

Aluminium Prices Rise on New Sanctions

Aluminium prices rose to their highest level since June 2022 as market participants considered the implications of a supply side squeeze given new sanctions on a number of Russian metals. Last Friday, London and Washington announced a joint ban on a number of metal imports from Russia aimed at targeting $40 billion of Russian exports of aluminium, copper, and nickel.

According to the UK government’s statement, “The London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) will no longer trade new aluminium, copper, and nickel produced by Russia.”

With Russia accounting for around 5% of global aluminium production, futures appreciated to above $2,500 per tonne as markets weighed up the impact of the new sanction.

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