HomeContributorsFundamental AnalysisUK Political Turmoil Continues

UK Political Turmoil Continues

Market movers today

The EU Council meeting continues in Brussels with focus on Ukraine and foreign policy topics, after the first agreements on the energy front have been reached overnight (see more below). Markets will also keep an eye on the evolving political situation in the UK.

Euro area October flash consumer confidence will likely continue even lower. We are still some way off the financial crisis levels, though.

Giorgia Meloni might be appointed new Italian prime minister as early as this afternoon, but differences in the coalition’s foreign policy stance on Ukraine first need to be ironed out.

In the Nordics, we get exiting news on the labour market with unemployment out of Sweden. We also get the number of Danish wage earners in August.

The 60 second overview

UK politics: Yesterday UK prime minister Liz Truss resigned after merely 44 days in office, making her the shortest serving prime minister in UK history. EUR/GBP moved back below 0.87 and 10Y gilt yields have dropped close to levels before Truss’s contentious tax cut plan was announced. Her resignation follows political turmoil amidst a growing confidence crisis in the Conservative party triggered by the mini-budget presented in September. To find the next PM and leader of the Conservative Party a leadership election will be conducted in the coming week, with a prime minister to be elected by Friday 28 October at the latest. Conservative MPs will vote to select the two final candidates, after which party members will cast the final deciding vote. Alternatively, the less popular candidate of the final two withdraws and the remaining candidate will thus win the election without the vote of party members. At present, former chancellor Rishi Sunak, former Prime Minister Boris Johnson and leader of the House of Commons Penny Mordaunt are the frontrunners to replace Truss.

Energy crisis: EU leaders agreed to press ahead with emergency action to address the energy crisis, with Germany yielding to pressure for a temporary natural gas price cap, after finding itself increasingly isolated on the European stage. EU leaders agreed to endorse further work towards a ‘temporary dynamic price corridor’ that would “immediately limit episodes of excessive gas prices”, but with heavy caveats to ally Berlin’s fears that market interventions could endanger supply security. The agreement also foresees a mechanism to limit the price of gas used for electricity generation (as already used in Spain and Portugal), a voluntary joint gas purchasing platform, the creation of a new complementary gas price benchmark by early 2023 as well as stepped-up efforts to cut gas demand. Details of the measures will have to be worked out by the Commission in the coming weeks and at an EU energy minister meeting next Tuesday. Natural gas spot prices continue to trade around EUR/Mwh 60, close to the lowest levels since the start of the war.

EU politics: Despite the energy compromise reached at the EU summit, further signs of souring Franco-German ties emerged after a bilateral cabinet meeting scheduled for next Wednesday was cancelled (and postponed to January). France and Germany currently find themselves at loggerheads on a number of issues, including the MidCat pipeline project, Scholz’ push for a European air defence system and the sudden announcement of the German energy package. For markets, souring Franco-German ties are bad news for the chance of another round of EU-backed borrowing, as big leaps in EU integration usually required the two pulling in the same direction.

Equities lower and the zig zag trading between sectors continued too. Yield sensitive sectors such as communication services and tech outperformed, while value cyclicals sold off and thereby reversing the prior session. Dow -0.3%, S&P -0.8%, Nasdaq -0.6% and Russell 2000 -1.2%. US futures are slightly lower this morning too.

FI: Another volatile session in the UK after PM Truss resigning. 10y Gilts traded in a 30bp range yesterday. 10y German Bunds traded in what has become usual volatility by now of a 10bp range, but ended the day just 2bp higher compared to Wednesday’s close. BTPs outperformed peers likely on account of a BTP Italia sale in November and that the centre-right parties are going to the President today. Bund ASW ended unchanged on the day, while Schatz ASW rose 3bp through the day.

FX: HUF continues the move higher – following last week’s surprise MNB rate hike – yesterday completing a 5% gain vs the EUR. Apart from this, moves have been fairly contained among FX majors in recent sessions, with V-shaped price action in most crosses including GBP following Truss’ resignation.

Credit: There was a bit of divergence between credit indices yesterday where high-beta underperformed low-beta. iTraxx Xover widened slightly less than 1bp while Main tightened 1.3bp.

Nordic macro

The labour market survey will be out in Sweden today. The labour market continues to be strong, but we see some weakening signals in especially hiring plans. Regarding the unemployment rate, we think it is too early to see a rise and expect the unemployment rate to be unchanged at 6.9% s.a.

Danish wage earner employment figures for August are also due. July saw employment fall for the first time in 17 months on the back of a reduction in public sector workers. Private sector employment was largely unchanged in July – a sign of weakness in that companies had been hiring more staff every month since the beginning of 2021. The slowdown is presumably due to a combination of weaker demand and increasing uncertainty causing companies to hold back; and many industries continue to experience difficulty in finding labour. We expect the Danish economy to slow going forward, which will likely mean falling employment eventually.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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