Last week we saw the final implosion of the British government, as a remarkable few hours saw Prime Minister Boris Johnson lose half his cabinet before eventually losing his job. UK markets rallied and the pound strengthened. Gains were not significant enough that too much should be read into them, but it definitely signals the market view that extreme political instability is bad for business. That the uncertainty of a leadership election is considered an improvement is telling.
Elsewhere tragedy struck in Japan after the country’s longest serving leader died after being shot while giving a speech. Shinzo Abe will be remembered for his bold economic reforms that pulled the nation out of a decades long slump and deflationary spiral. The strategy became known globally as “Abenomics” and provided a template for the huge fiscal interventions pursued by countries during the pandemic. The assassination of the former prime minister has shocked Japan as gun ownership is very low and violent against politicians is rare.
GLOBAL: COMMODITY PRICES FALLING SHARPLY AS GLOBAL DEMAND COOLS
The price of oil has dropped in recent days as the rising chance of recession dampens down expectation for demand. From a recent high of $123 a barrel in mid-June the spot price of Brent Crude has fallen to $100 as fear of recession combined with a general risk-off mood among traders. In contrast, the price of gas in the UK and Europe has continued to rise as markets consider the impact of lower Russian supplies. Coal has also been climbing as countries look to bring coal-fired power stations back online to offset any loss of gas supplies.
Although gas and coal prices are rising, the general picture for commodities is one of falling prices. Industrial metals, such as copper and iron, have fallen sharply since peaking in April and agricultural commodities, such as wheat, are also down substantially from recent highs despite concerns about global shortages. Overall, the S&P GSCI Commodity index has fallen 17.8% since early June meaning some inflationary pressures are beginning to ease.
UK: POLITICAL DRAMA LEAVES STERLING RELATIVELY UNMOVED
Boris Johnson was forced to resign as prime minister after suffering an avalanche of resignations as his government and the wider Conservative party lost patience with his leadership. The resignations were led by chancellor Rishi Sunak and health secretary Sajid Javid who both resigned due to a loss of confidence in the prime minister’s competence. Nadhim Zahawi was appointed as the UK’s new chancellor and promptly proposed a roll back on the government’s plans to raise corporation tax.
Uncertainty is usually bad for financial markets, but they remained relatively unmoved by the chaos. Sterling has fallen sharply against the dollar this month and although it ticked up slightly to 1.20 against the US dollar following Johnson’s resignation it remains far below its value of a month ago. Meanwhile, the euro fell to a 20-year low of 1.016 against the US dollar. Investors are grappling with the possibility that Russia cuts gas supplies to Europe and the economic shock makes it difficult for the European Central Bank to tighten policy.
BONDS: CENTRAL BANKS WORRIED BY LONG-TERM OUTLOOK FOR INFLATION
Government bond yields remain below recent highs despite central banks continued attempts to talk up their determination to tackle inflation. The minutes from last month’s US Fed interest rate meeting point to a second 0.75% rate hike this month over concerns that high inflation could become entrenched. The Bank of England is also stressing that rate hikes will continue despite the risk to growth. This week BoE chief economist Huw Pill said the bank will step up the rate of tightening if inflation continues to climb and the bank’s current outlook is for zero growth over the next year or so.
Elsewhere, data from the latest round of PMI surveys show that global manufacturing output is expanding as production in China recovered from recent Covid lockdowns and services output has remained relatively robust. However, new orders and exports continue to slow and business confidence is falling. Bond markets appear unmoved by central banks’ statements and 10-year government bond yields remain lower than a month ago.