Good Morning,


Here are this mornings headlines:

The markets finally seem to have worked out that it isn’t all that rosy in the UK at the moment: Sterling sold off pretty sharply yesterday as the petrol crisis continued and has sparked questions over what this might do to a precarious economic recovery, whilst Andrew Bailey admitted on Monday that interest rates may have to rise this year in a bid to reign in inflation. We don’t think we will see a rate rise this year, but talking so candidly about the possibility means that it’s not going to be too far down the track, and if the BoE is forced to raise rates because inflation tops their 4% forecast might mean that they further hamper what growth there is in the economy. IF they raise rates and IF this hurts growth and IF inflation isn’t nipped in the bud then we could be getting into stagflation territory and this is the word that is now doing the rounds – we’re not there yet and plenty of economists see this as a risk but not the base case, but markets buy the rumour and sell the fact, so of course they’re getting in there early.

UK & France 
Relations with the French are being tested again, as the UK government has rejected 75% of the applications made by small French vessels to fish UK waters. Just 12 out of 47 license applications have been granted and Jersey is also set to announce that it will grant less than have been requested too. The news has gone down like a lead balloon in France and is being added to the list of things the countries currently disagree on. Michel Barnier who is running against Emmanuel Macron for the presidency said yesterday “there are too many points of disappointment from our side” suggesting there could be retaliatory action – even if that wasn’t led by government, French fishermen would happily take matters into their own hands and could start port blockades again. Boris’ risk is that if the French were to decide to cease their interventions of migrant crossings, then the numbers making the journey to the UK could swell, which would be terrible PR – still, a fishing disagreement might just be just the media distraction that the government could do with at the moment…

US Debt
It’s not just UK risk sentiment that’s being hampered; across the Pond the Us debt ceiling is starting to play on people’s minds, particularly as Janet Yellen has calculated that the government would run out of money by October the 18th.  We were expecting movement on a bill to suspend the debt ceiling this week, but so far that hasn’t materialised, so Treasury Secretary Yellen is doing her bit to raise concern. Her concerns were raised in a letter to congressional leaders, stating that “we know from previous debt limit impasses that waiting until the last minute can cause serious harm to business and consumer confidence, raise borrowing costs for taxpayers and negatively impact the credit rating of the United States for years to come”, whether that’s enough fear for anyone to reach across the aisle and get this done is anybody’s guess. Markets in the US sold-off sharply, with the S&P down more than 2%, but interestingly it seems with government shutdowns that the fear comes before the shutdown but during them markets actually perform ok – over the last five shutdowns the S&P increased in value and in the last one in December 2018 rose by almost 10% over the course of the 35 days.

Staying in the US: Fed Chairman Jerome Powell is up for renomination and Senator Elizabeth Warren has made her feelings on his leadership incredibly clear by saying “over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed”. Her view is that Mr Powell has been lucky to avoid a major banking crisis on his watch but pointed to the 2008 financial crisis being seeded years in advance by decisions on deregulation. Mr Powell’s first four-year term comes to an end in February and though it is likely that Biden will invite him to take a second term the odds have reduced from 80% to 70% following Ms Warren’s appraisal.

Hidden Debt to China
An article in the FT caught our attention this morning, which talks about the hidden debts that countries owe to China as part of the Belt and Road initiative: New research undertaken by AidData reveals debt levels far higher than were previously estimated because instead of China effectively lending to central banks, they’re now lending to state owned enterprises or SPV’s that may have a guarantee in place by the central bank, but don’t show up as national liabilities. The numbers are massive, with “unreported debts” around $385bn and more than 40 countries owing to China more than 10% of their GDP. Another interesting statistic is that 35% of Belt and Road projects have encountered major implementation issues, such as corruption scandals, labour violations or environmental hazards, whereas only 21% Chinese infra projects that don’t fall within the Belt and Road initiative suffer the same issues.

The full AidData report is here:


New Zealand
Elsewhere, New Zealand has seen covid cases jump to 45 new cases, all concentrated in Auckland. This takes current case numbers to 1,230 and is a big jump from eight cases the day before. This has sent the currency lower and the concern over whether the country can get back to ‘zero covid’ is growing. As much as Jacinda Ardern wants to get back to zero, there is also pressure from New Zealanders living outside the country for her to drop border closures and allow citizens back into the country. The government released 3,800 seats on flights back into the country yesterday and more than 35,000 applied to get one of those seats.
Looking Ahead
Today we’ve seen the market start with a big sell-off again in Sterling, following a bit of a recovery yesterday evening. There was no data driving the move, so it looks like the City getting online and deciding on its mood for the day ahead. Asian markets were lower overnight and European ones have followed suit. Data ahead isn’t too plentiful, but energy inventories out of the US might have an impact on oil prices, which could do with cooling down having broken $80 yesterday.

Have a great day!


* indicates required


Sign up to get our insights directly to your inbox

Sign up