Liz Truss was appointed Prime Minister of the United Kingdom on 6 September 2022, a position she held for just 44 days. Her resignation announcement on Thursday has triggered yet another Conservative Party leadership race. In a tweet explaining her resignation, the Prime Minister cited her inability to fulfill the mandate on which she was elected as the reason for stepping down. Questions around Truss’s leadership had been amplified following the resignation of her Home Secretary, Suella Braverman, who left following a technical breach of ministerial rules and issued a stern critique of the current direction of government in her formal resignation announcement.
In other unwelcome news, this week the UK’s Office for National Statistics reported year-on-year Consumer Price Index (CPI) inflation and core CPI inflation rates of 10.1% and 6.5% respectively for September. UK households are contending with a ‘cost of living crisis’ which began in late 2021 as the cost of essential goods and services increased ahead of income levels. Consumer confidence in the UK declined from -7 points in July 2021 to -49 points in September 2022, the worst score since records began, with the number expected to fall to -52 points in October.
Households aside, the market recently rejected Kwasi Kwarteng’s mini budget which proposed ending the 45% income tax band for high income earners, reversing the planned 2023 increase in corporate tax rates from 19% to 25%, and cutting stamp duties on property purchases. The market’s reaction was punitive. The pound plummeted to a record low against the dollar of 1.0382, while yields on 10-year UK Gilts peaked at 4.5% in October, their highest level since September 2008, after the Bank of England (BoE) was forced to intervene in bond markets as a buyer of last resort for UK pension funds. UK pension funds became reluctant sellers of high-quality secured debt to cover margin calls from their leveraged positions better known as ‘liability driven investments’ (LDIs). On Thursday, asset management firm, Schroders, reported a 9% decline in its solutions unit’s assets under management (AUM) due to losses on its LDIs.
DATA IN A NUTSHELL
The US Department of Labor’s weekly Initial Jobless Claims fell 12,000 to 214,000 claims beating market expectations of 230,000 claims in September. On the negative front, US housing starts fell by
8.1% month-on-month to 1.439 million units in September, below expectations of a 7.2% drop and after a 13.7% increase in the construction of new homes in August. On Wednesday, President of the US Federal Reserve Bank of St. Louis, James Bullard, expressed a rare dovish tone saying that he expects the Fed to end its aggressive rate hikes by early next year.
Germany’s Producer Price Index (PPI) inflation for September fell to 2.3% month-on-month, missing expectations of a 1.5% print, while year-on-year PPI inflation hit a record high of 45.8%, 40 basis points above expectations. In the UK, high food costs drove CPI inflation to 10.1% year-on-year, which was 10 basis points ahead of expectations.
EARNINGS SEASON OFF TO A GOOD START IN THE US
Earnings season is in full swing in the US. After a reasonably positive start by the US banks at the end of last week, both the S&P 500 and the Nasdaq Composite were positive for the week, returning 3.1% and 3.5% respectively. This week, two of the most anticipated earnings releases were Netflix and Tesla. Netflix beat third-quarter expectations on both the top and bottom line, as a result of the company bucking recent negative trends to add 2.4 million net subscribers during the quarter, which was around one million higher than it had forecast. Netflix shares soared over 14% on the back of the good results and the company made mention that it would crack down on password sharing next year. Tesla reported $3.7 billion of operating profit and $21.5 billion of revenue, which were both new records, but given the lofty expectations around every release from the company, this came as a disappointment to investors and the stock traded flat to slightly negative on the update.
OIL FIRMS ON TIGHT SUPPLY
Brent Crude advanced on the back of a surprise drop in US crude inventories as US crude futures traded 1.8% higher at $86/barrel while the spot price reached an intra-day high of close to $95/barrel. The data released on Wednesday showed that US crude oil inventories shrank by 1.7 million barrels last week, indicating that crude consumption in the US remains resilient, despite the hit to disposable income caused by rising inflation.
Oil prices were further supported by news that China – the world’s largest crude importer and whose strict COVID-19 controls this year have weighed negatively on economic activity and fuel demand – is considering easing some COVID-19 restrictions such as the duration of quarantine for inbound visitors. However, the shift in policy needs to be approved by senior leaders, so could still be altered, or not deployed at all. Further tailwinds for the oil price are being provided by the output cuts from the expanded Organization of the Petroleum Exporting Countries, OPEC+, as well as the looming ban on Russian crude and oil products.
YEN SLIDES PAST KEY LEVEL
The Japanese yen slid past the key psychological level of ¥150/$ for the first time since 1990, keeping investors on high alert and boosting the speculation that more BoJ intervention will be needed to support the currency. The yen fell by 0.2% on Thursday to ¥150.08/$, only to reverse those losses to gain 0.1% to ¥149.73/$. Despite Japan spending a record ¥2.8 trillion ($19.7 billion) in September to protect its currency, the downward trajectory has remained intact, with the yen giving back all of the intervention-induced gains. A strong dollar has appreciated by about 30% against the Japanese currency this year.
The British pound strengthened against all major currencies following Prime Minister Truss’s resignation. The sterling was up by over 1% to trade past £1.13/$ and the yield on 10-year bonds fell five basis points to 3.83%. Expectations for an aggressive 100 basis point rate hike during the BoE’s November meeting have also been dialed back to an 8% probability, according to the rate futures market, down from 25% earlier on Thursday.
The Russian rouble strengthened toward ₽61/$ on Thursday, as a favourable month-end tax period supported the Russian currency in the face of ongoing oil market volatility, geopolitical and sanctions risk. The rouble is supported by a month-end period which sees export-focused businesses transfer foreign exchange income into roubles to settle domestic tax obligations.
The pound started the day trading at 1.1242/$ and 1.1474/€.
Written by Citadel Equity Analysts, Thambo Mthwalo and Zain Ghoor.
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