Quid Games to Continue
Quid Games to Continue
Wow – what a week that was! Sterling touched an all-time low of 1.0382 during a flash crash early last Monday before bouncing back to pretty much end the week higher than it started. Sterling had been slipping lower for several weeks before it began to run full tilt downhill after Kwasi Kwarteng’s mini/maxi budget appeared to give it the final push. The sell-off mainly occurred in New Zealand amongst what must be said low volume, but nonetheless, it sent shivers through the market and caused everyone and their dog to become an expert on currency trading. Volatility also spread into the gilt market, forcing the Bank of England to intervene, calming the market. The fall in sterling was, we believe, caused in great part by the Bank of England’s hesitancy to raise interest rates to combat inflation. This hesitancy hasn’t gone away, and consequently, sterling remains exceptionally vulnerable. To underline the worries, the derivative markets indicate that the daily range on sterling looks to be more than 4 cents a day!
Last week was undoubtedly one of the most volatile weeks in the financial markets that any of us can remember. Arguably, the movements were made worse by last Friday being a month and quarter end and the subsequent portfolio squaring. With the inflation report in the US still showing that price rises are running hot, despite what many wish for, it appears unlikely that the Fed will pivot. The European inflation report released on Friday, which at an annual rate of 10%, must be worrying news for the European Central Bank and puts pressure on them to raise rates by a further 75bp to match what seems to be an inevitable rise by the Fed. And if this wasn’t enough worrying news to end a historic week in the markets, President Putin piped up with worrying threats to world peace.
At least this week has started a little quieter than last, with sterling trading just below 1.1200, buoyed this morning by the reversal of the abolition of the 45p tax rate. An interesting start to what looks to be another challenging week ahead! The major event, as always in the first week of the month, is the jobs report from the USA. If, as expected, unemployment stays at 3.7% and payrolls increase by 200,000, it seems likely that we will get another 75bp rise at the next Federal Reserve meeting on November 2nd. Also of interest will be the ISM business activity reports, released on Wednesday, which are expected to stay just about positive. Fedspeak-wise, there will be plenty of opportunities for the Federal Reserve to reinforce its message of policy tightening, with no less than eleven speeches scheduled from Fed officials.
Sterling, of course, will remain under the spotlight for the next few days at least and possibly vulnerable to mischief-making headlines in the media. It seems most unlikely that newly elected leader Liz Truss will face any leadership challenges; however, there may be some indication of spending cuts which would be welcome. As we said last week, her policies have created a Dr Dolittle-ish PushmI-Pullyu problem between fiscal and monetary policy. There are certainly opportunities for the Government and the Bank of England to explain themselves. First up, chancellor Kwasi Kwarteng speaks at the Conservative Party conference late this afternoon, followed by Catherine Mann from the BoE later this evening, and their performances may set the tone for sterling. With a little price stability returning to both the currency and bond markets at the end of the week, it feels unlikely that the Old Lady will feel the need for an inter-meeting rate rise. But, and it’s a big but, if the derivative markets in interest rates and currencies are to be believed, we are not out of the woods yet, and sterling still looks a bit sickly.
There is not too much to excite one’s appetite from the eurozone this week, with Retail Sales on Thursday the highlight of the thin data calendar. Sales have generally been declining since the back end of last year, and it is unlikely that this trend will reverse in August. Also released are the Eurozone S&P Purchasing Manager’s Indexes around the time this note hits your inbox, and their Services and Composite PMIs are released on Thursday. With inflation roaring, as evidenced by last Friday’s data, we expect some jaw-jaw from the mouthpieces of the European Central Bank this week, and the minutes from the last meeting of the ECB will be published on Thursday, which should reinforce the council’s hawkishness. As we recently mentioned, the last quarter of the year is often the most volatile, and there are signs that some parts of the financial markets are becoming dysfunctional. October is traditionally the trickiest month of all, so tread carefully and remember we are here to hold your hand during these testing times.
20221003
