Trussed up in the Khazi
Not even Nostradamus could have predicted the goings on in October, given the wild swings, politically and financially.
The first half saw global markets teetering on the edge and then in the second half there was a greater sense of stability and yet global behemoths lost billions and Elon Musk became a hesitant (initially) $44 billion media baron. This was reflected in the VIX index, which sat above 30 for that first half, peaking at 34 on 11 October. No question, the world has gone mad and bad, creaking under low growth, inflation and overdue central bank action.
Doing a ‘Kwasi’ will forever be known as the ‘mother and father’ of financial ‘u’ turns…
In true Carry On style, the catalyst for much of this early on was the new level of craziness in the UK as it took to wearing the ‘dunces cap’. Doing a ‘Kwasi’ will forever be known as the ‘mother and father’ of financial ‘u’ turns… For this is how the month started, with the now former British Chancellor Kwasi Kwarteng backtracking on the 45% tax threshold a mere ten days after announcing it, in what was termed the ‘mini budget’. Goldman Sachs saw this as reason enough to downgrade the UK. Kwarteng could not stick around, as Truss hung him out to dry, flushing him down the Khazi, or was it Kwazi… and in came a new Chancellor, Jeremy Hunt.
The culmination of this was the UK Prime Minister Liz Truss resigning after only 44 days, a record short stint that was likewise welcomed by the markets, who gave it a standing ovation as GBP strengthened and gilt yields rose. For so long, a paragon of stability, the UK is now being described as the new Italy, with revolving door politics and flipflopping economic policy. The new incumbent at Number 10, Rishi Sunak, is certainly a safer pair of hands, but there is much work to do and by the end of the month UK debt was once again cheaper than French.
The UK’s economic predicament was reflected by the stream of dire economic data, which for once could not be blamed on Truss. UK manufacturing PMI came in at 45.8, when the estimate was 48. A year ago, this stood at 57.8 and in September it was 48.4. New orders data saw the sharpest fall since January 2021. All manner of commentators and financial bigwigs came out of the woodwork to talk up deep recessionary concerns and even Sunak said that the UK is facing a “profound economic crisis.” The UK is almost certainly in recession, perhaps not technically, but certainly in real terms.
…most economists think the US will suffer some form of recession in 2023…
In contrast the US economy rebounded in the third quarter, having contracted in the previous six months. This eases, albeit temporary, recessionary concerns, with most economists thinking the US will suffer some form of recession in 2023, as falling exports and slowing domestic demand feed through to the economy. Certainly, confidence is low, with the Chicago business barometer coming in at 45.2 in October, down from 45.7 the previous month.
We are now eight months into the appalling Russia/ Ukraine conflict. It is extraordinary how we are all so beholden to Putin’s decision making, although his fiercer rhetoric on nuclear destruction appears to be treated less seriously than the actual physical moves to impact energy markets. This month saw Russia dramatically escalate its attacks on Ukraine’s infrastructure following the Crimea bridge bombing. Yet Ukraine amazingly still appears to have the upper hand, reclaiming thousands of square miles of stolen land. There are, as always, plenty of moving parts, and far further to go on this story, but this is the closest we have been to global nuclear war since the 1960s Cuban missile crisis.
While most countries are treading water and rudderless, China has made it exceptionally clear where it is heading.
While most countries are treading water and rudderless, China has made it exceptionally clear where it is heading. Given what we witnessed in the past few weeks, it is whichever direction President Xi is going, as he further tightens his grip on power, with the economy largely playing second fiddle. During the twice-in-a-decade party congress, Xi secured an unprecedented third term in office, strengthening his hand with a new slate of appointed loyalists. In terms of optics, Xi epitomises the definition of a strong man and made this all the more apparent, and a reminder to his country and the West as to the power he wields, when he very publicly removed the former leader, Hu Jintao, from the party congress stage.
Politically, China may be strong, but economically the data hasn’t been great. During the month they released the weakest employment prospects on record. Lockdowns are impacting the economy, which grew at 3.8% in Q3, far below Beijing’s 5.5% target.
Compared to the West, Japanese inflation at 3% sits far below other Western countries. But this masks the economic malaise the country is suffering with the prices companies are charging each other rising by 9.7% during the month; while a Reuters corporate survey revealed increasing unease. To stimulate the economy on 28 October the Bank of Japan announced a $200 billion package, designed to cut energy costs and bring down consumer inflation.
Global inflation remains high, but the acceleration of costs appears to have tailed off. This does not make the picture any healthier, with UK inflation sitting at a 40 year high of 10.1% and Euro Zone at 10.7%. That global interest rates will continue rising is not in question (excluding Japan that has kept rates on hold) instead the question is by how much. The market is pricing in US rates at 5% next year, with a further 75bps expected on Wednesday. But there was also talk mid-month that the Fed is likely to slow down rises from December, news that the market lapped up with the S&P 500 up almost 5.0% on 21 October. As expected, the ECB increased interest rates by 0.75% on 27 October.
Energy prices continue to sit below recent highs. On 5 October, Opec+ announced it was cutting output by 2 million barrels a day, a move that the White House believed was Opec aligning with Russia. European gas prices then slumped on 24 October to below €100 for the first time since Russia cut supplies. As things stand, Europe is currently being saved by the glut of LNG and unseasonably warm weather, with full ships reported to be waiting off Europe’s coast for gas prices to rise once more.
Europe is currently being saved by the glut of LNG and unseasonably warm weather…
Equities were volatile during the month, but the trend was largely up. There were two big stories that really stood out, big tech and China. In big tech, it was all about market disappointment, with Meta’s shares plummeting 25% on missed earnings estimates, which was followed by Amazon’s falling 15% on news that the holiday shopping season is expected to be disappointing. These moves have pummelled investor portfolios this year, with Amazon down around 40% year-to-date and Meta faring even worse, down over 70%. China, we have mentioned, has been all about Xi strengthening his position, but it was the investor flight to safety that was so striking, or as Bloomberg wrote the ‘epic rush to the exits’ as China equities lost $447 billion and the Yuan sank. By the end of the month, the SSE was down 2.7%. In North America, the S&P 500 rose 8.0% and the Nasdaq 3.9%; in Europe, the DAX was up over 9% and FTSE 100 almost 3%.
This was a reasonably calm month in crypto. Bitcoin moved around the $19,000/ 20,000 level through much of the month to close up around 5%, while Ethereum jumped almost 18%.