UK Queen Elizabeth II dies at the age of 96

Headlines

• UK Queen Elizabeth II dies at the age of 96

• The Pentagon quietly sent Ukraine its most accurate artillery shell, a satellite-guided weapon that can hit within seven feet of its target.

• Two floating LNG terminals are setting up in a Dutch port, the first in a wave of the specialist tankers that Europe is banking on to ease the worst energy crunch in decades.

• Biden delays China tariff decision. 

• ECB unleashes jumbo hike; euro slips as Lagarde speaks.

• UK to cap energy bills as inflation spirals.

• Mortgage rates in the US climbed to 5.89%, the highest level since 2008.

• China's inflation slows in August.

Whether you were a royalist or not, it is sad to see the end of the reign of Queen Elizabeth II, our longest reigning monarch. Many hoped Charles would stand aside for William to become King, however, that is not the case, so I am not sure what that will mean for the royal family going forward. With Harry and Andrew causing embarrassment and controversy, will the royal family become an unwanted relic with Charles as King?

The ECB went with a historic 75 basic points hike and yet the Euro hardly reacted. Inflation and the war on its doorstep are taking their toll, plus record high power prices, although oils drop will be welcome. Central banks are having to decide if a recession is easier to manage than high inflation. Expect more hikes until the end of the year.

Although Putin is struggling in Ukraine, his economic war with Europe continues to punish economies and households. It is the right thing to do, for governments to absorb the cost of power prices…as I have been writing for some time. By doing this they will reduce inflation quicker and have more impact than the central banks rate hikes. There is still the possibility to only enter a shallow recession, although, with households being spared some of the expected expense on electricity and gas, will this add more pressure to inflation; personally, I doubt it as households will just be grateful some of the burden has been eased, this does not change the fact prices are still considerably higher than pre-war levels.

An article below mentions Russia should be prepared to lose the war in Ukraine. Personally, if it gets close to that point, I expect Putin to change tactics and become more aggressive with his selection of weapons. He is not used to losing!

We are seeing USD weakness this morning with most contract in the green.

Global News

The ECB did it. In a historic move and the single largest rate hike since the start of the monetary union, the ECB just announced it will hike all three policy interest rates by 75bp. At the same time, the ECB decided to suspend the two-tier system by setting the multiplier to zero.

With today’s decision, it is clear that the ECB has given up on inflation targeting and forecasting and has joined the group of central banks focusing on bringing down actual inflation. It’s not so much a new strategy based on conviction but rather a strategy based on missing alternatives. We still can’t see how monetary policy can bring down inflation that is mainly driven by (external) supply-side factors. Even the impact of policy rate hikes on inflation expectations is anything but certain. At the same time, the size of today’s rate hike will not determine whether or not the eurozone economy slides into recession and will also not make the recession more or less severe. Any recession in the eurozone in the winter will be driven by energy prices and not by interest rates.

Today’s decision shows that the doves and hawks are on the same page. We will have to wait for ECB President Christine Lagarde’s comments at the press conference but at face value, today’s decision shows that the ECB is willing to hike interest rates towards the upper rather than lower end of the range of neutral interest rates. In our view, this range for the refi rate is between 1% and 2%. It indeed looks as if the doves have left the ECB nest.

While Christine Lagarde had not made any public remarks on monetary policy since the end of the summer, ECB Chief Economist Philip Lane went on record calling for a more gradual and measured approach to normalising rates. Today’s decision shows that Lane’s influence in ECB decisions has been significantly diminished.

For us, today’s decision also means that we will have to strongly adjust our ECB call. Dovishness is no more, even if the ECB is still far more optimistic about growth (+0.9%) in 2023 than we are (-0.6%). The question remains whether the ECB would really be willing to continue hiking as aggressively as they are suggesting if the recession becomes reality. Hiking into a recession is one thing, hiking throughout a recession another.ING

Federal Reserve Chair Jerome Powell’s comments to the Cato institute’s conference today on monetary policy are clearly supportive of a third consecutive 75bp interest rate hike on 21 September. There is no hint that he supports moderation, arguing that “we need to act now, forthrightly, strongly as we have been doing and we have to keep at it until the job is done”. There is also the usual mention of inflation expectations and the need to anchor them in order to ensure inflation doesn’t become ingrained.

The latest data certainly backs the case for 75bp with business surveys looking robust, the labour market continuing to create jobs in significant numbers, and next week’s inflation numbers set to show core CPI accelerating to 6.1% from 5.9%. Moreover, the third quarter is shaping up to be quite a strong one, fully reversing the declines seen in GDP in the first half of the year.

Inventories and net trade are swinging back and set to make decent positive contributions to headline growth. Meanwhile, consumer spending is being boosted by the lift in spending power from lower gasoline prices. High-frequency data over the Labor Day holiday show restaurant dining at record levels, while air passenger travel over the past weekend exceeded that of 2019 for the first time, so 3% growth looks to be on the cards.

Nonetheless, the deteriorating global outlook and weakening domestic housing market combined with the cumulative impact of policy tightening and the strong dollar means we think the Fed will moderate its hiking to 50bp in November and 25bp in December. Weaker wage pressure and more limited month-on-month increases in CPI thanks to lower import and other input costs would certainly help this argument. ING

Nothing can stop the dollar's surge as global imbalances grow ever more intense, John Authers writes. What other central banks do is becoming irrelevant. If energy prices keep rising, they'll have the same impact as a big fiscal shock. This would undermine the euro. News of another lockdown in China's Chengdu reinforces the risks to growth.BB

The Federal Reserve’s battle to bring inflation under control will likely cause more harm to the US and world economy than is currently appreciated, according to a pair of papers set for presentation at a renowned economic conference this week. Fed Chair Jerome Powell and his colleagues will probably have to push unemployment significantly higher in order to hit their 2% inflation target, according to one of the papers. Goldman Sachs now expects the Fed to hike by 75 basis points this month and 50 basis points in November, up from their previous forecasts of 50 basis points and 25 basis points respectively. Fed Vice Chair Lael Brainard said the US central bank will have to raise interest rates to restrictive levels, while cautioning risks would become more two-sided in the future.BB

Tesla's China operations are back in full swing after an upgrade to its factory in Shanghai and a Covid lockdown in the city slowed production earlier this year. The EV maker delivered 76,965 Chinese-made vehicles in August, just shy of a record set in June and almost three times as many as in July.BB

The UK announced a sweeping package of measures to contain spiraling energy bills, which would cap the average cost of energy for households at £2,500 a year from October, well below the £3,548 they would have paid without the intervention. Officials estimate the plan will reduce inflation by 4 to 5 percentage points. And it doesn't stop there. The Treasury is setting up a £40 billion fund with the BOE to help energy companies access extra liquidity they need to deal with surging prices.BB

EU officials know deep down that they will have their work cut out in trying to improve ties with Britain's new PM, writes Lionel Laurent. There's pessimism Liz Truss will end the EU blame game that helped her win the Conservative leadership. But perhaps the severity of the looming energy crisis may spur improved ties.

Time isn't really on Russia's side in this war, even if Vladimir Putin appears to believe otherwise, writes Leonid Bershidsky. He's overestimating the weakness of Europe's democracies and underestimating Ukraine's willingness to fight. Russians should consider the very real possibility of defeat. BB

Commodities

India, the world’s biggest rice shipper, levied a tax on some exports to secure domestic supplies after planting shrank, in a move that could further rattle global food markets. Unmilled and husked brown rice will attract an export levy of 20%, with a similar duty on semi-milled and wholly-milled rice, except parboiled and basmati varieties. The move will put pressure on countries struggling with worsening hunger and soaring food inflation. The United Nations estimated that one-tenth of the world’s population went hungry in 2021.BB

U.S. says Russia price cap should take risk premium out of oil market - The price cap that G7 countries want to impose on Russian oil to punish Moscow should be set at a fair market value minus any risk premium resulting from its invasion of Ukraine, a U.S. Treasury Department official told reporters. The price should be set above the marginal production cost of Russia's oil and take into consideration historical prices, said Elizabeth Rosenberg, U.S. Treasury Assistant Secretary for Terrorist Financing and Financial Crimes.

U.S. evaluating need for further SPR oil releases after October -Granholm - U.S. President Joe Biden's administration is weighing the need for further releases of crude oil from the nation's emergency stockpiles after the current program ends in October, Energy Secretary Jennifer Granholm told Reuters on Thursday. A Department Of Energy official later said the White House was not considering new releases from the U.S. Strategic Petroleum Reserve (SPR) at this time beyond the 180 million barrels that the president announced months ago

India's rice curbs to lift prices, stoke food inflation worries - India's decision to curb rice exports is expected to lift world prices of the staple and trigger a rally in rival wheat and corn markets, deepening concerns over food inflation. India banned exports of broken rice and imposed a 20% duty on exports of various grades of rice on Thursday as the world's biggest exporter of the grain tries to augment supplies and calm local prices after below-average monsoon rainfall curtailed planting. 

Frosts hit Argentina wheat crop though losses limited, grains exchange says - Frosts recorded in the last two weeks in Argentina have caused some damage to the South American country's 2022/23 wheat crop, the Buenos Aires grains exchange said on Thursday. The frost damage adds to the impact caused by drought seen in recent months, which led the key grains exchange to cut its wheat planting forecast from an initial level of 6.6 million hectares to 6.1 million hectares.

Glencore faces Australian challenge over net-zero strategy - Environmental lawyers ClientEarth said on Thursday they were supporting a complaint filed in Australia against Glencore alleging the miner and trader could be misleading investors and the public over its climate strategy. In a letter dated Sept. 2, several green groups including the Environmental Defenders Office (EDO) asked the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission to investigate Glencore's statements detailing its plan to hit net-zero carbon emissions by 2050.

Evraz's North American assets sale muddled by Canada's sanctions - United States Steel Corp and Nucor Corporation are likely bidders for the North American unit of Russian steel producer Evraz Plc, though Canada's sanctions against Russia complicate the process, according to steel sector industry executives and investment bankers. London-listed Evraz put its North American assets on sale in August after Britain sanctioned it in response to Russia's invasion of Ukraine.

Britain goes big to ease energy shock, EU meets on Friday - Britain will cap consumer energy bills for two years and funnel billions to prop up power companies, its new leader Liz Truss said on Thursday in a bid to tackle an energy crisis that has Europe and Russia squaring off in a deepening economic war. European governments are spending hundreds of billions of euros to help consumers and businesses cope with soaring energy bills as the price of gas, already high post the COVID pandemic, went stratospheric in the wake of Russia's invasion of Ukraine.

North Korea has officially enshrined the right to use pre-emptive nuclear strikes to protect itself in a new law that leader Kim Jong Un said makes its nuclear status "irreversible" and bars denuclearisation talks, state media reported on Friday. The move comes as observers say North Korea appears to be preparing to resume nuclear testing for the first time since 2017, after historic summits with then-U.S. President Donald Trump and other world leaders in 2018 failed to persuade Kim to abandon his weapons development. - reuters

Portugal approves energy-saving plan, may beat EU target - Portugal approved on Thursday an energy-saving plan through the end of 2023 that should allow it to meet the target for reducing gas usage set by Brussels and even surpass it at some point next year, Environment Minister Duarte Cordeiro said. The plan, part of the European Union's push to wean itself off Russian gas, follows similar steps elsewhere in Europe and includes mandatory measures for the central administration and recommendations for municipalities and companies, with whom the government has previously discussed the package.

Brazilian corn exporters face bureaucracy to ship corn to China - Brazil is still processing the documentation from firms interested in exporting corn to China, as well as preparing to inspect grain warehouses at ports, the agriculture ministry said on Thursday. Once this process is concluded and the information is sent to the Chinese, Brazil will remove the final obstacles to be able to export, the ministry added.

Top Polish port sees coal imports at 4-5 mln tonnes in Aug-Dec - Poland's biggest port will import 4-5 million tonnes of coal between August and December, Slawomir Michalewski, chief financial officer of the Port of Gdansk Authority said on Thursday. "In August we received 1.07 million tonnes. At this rate, via our port alone we will receive 4-5 million tonnes of coal by December."

Market levels (all analysis is based on CME futures contracts)

DISCLAIMER.
The content of this daily newsletter should only be considered a guide and views, opinions or content contained in this email is provided solely for information purposes and does not constitute investment advice or a solicitation to trade or invest.

Chris Tubby
Senior Director Trading and Education
Symax Fintech