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Worries depress market sentiment

Numerous central banks are meeting this week, including the Federal Reserve’s Federal Open Market Committee, where we might learn more about its quantitative easing taper timeline. However, that isn’t what markets are talking about this Monday. Pick up any newspaper, and you’ll see fears of cost rises all over the front page. The two key fears centre around acute natural gas shortages and housing affordability. 

The price of natural gas futures—used for heating homes in the UK—have surged very steeply due to Covid delays in field maintenance and reduced Russian supply. Depending on the contract, the cost to hedge costs has increased +200% since mid-2021, which is forcing upstart energy suppliers to make heavy losses for any new customers. This is because the Office of Gas and Electricity Markets has set rate caps that are below current costs. 

Source: Bloomberg 

This means the potential loss of much of the smaller competition, meant to make energy markets competitive, or passing along unreasonably high price increases to consumers. The government is mulling a variety of ways to prevent either scenario, but there doesn’t seem to be an easy answer. Establishing a Northern Rock-style bad loans book is unpalatable because it’ll ultimately mean the taxpayer foots the bill for poor risk management and thin firm capitalization. Letting the competitive field thin is also to be avoided since it returns the market to a state of limited competition and threatens long-term consumer welfare. The government will need to find a middle ground that apportions some losses to industry but doesn’t let the good go with the bad. 

Bottom line: The second fear is one we’ve discussed in recent weekly updates, and that’s the surge in house prices which threatens to leave behind an entire generation of would-be homeowners. This long-term problem is getting fresh attention because Covid—and monetary policy—has caused a fresh surge in fixed asset prices. Using data from the Organisation for Economic Co-operation and Development, Bloomberg has created this helpful graph of changes in house prices to income ratios. It shows that UK house prices have doubled compared to incomes since 1995; the problem is undoubtedly worse if you look at major cities where buy-to-let hasn’t only impacted purchase prices, but rents as well, since they need to cover increasingly onerous mortgage terms. 

Source: Bloomberg 

The week ahead


Cable has moved back below $1.37 after falling around 0.75% last week, reaching its lowest levels for almost a month, as risk-off sentiment builds heading into a central bank-focused trading week. Both the possibility of a formal announcement from the Federal Reserve on tapering, and criticism from the Speaker of the US House of Representatives, Nancy Pelosi, on the UK’s handling of the Northern Ireland protocol have continued to weigh on the pair. The most recent Bank of England survey of inflation expectations has seen satisfaction with the control of prices hitting its lowest level since November 2011. With the Monetary Policy Committee set to meet this Thursday, and the addition of Huw Pill and Catherine Mann to the committee, comments will be closely watched following UK inflation hitting 3.20% in August, which is the highest level since records began.

  • The Rightmove House Price Index expanded 0.30% m/m in September compared with a 0.30% contraction in August.
  • Flash Manufacturing Purchasing Managers’ Index and Services PMIs are due for release on Thursday and are forecast to be little changed from their August readings of 59.0 and 55.0, respectively.
  • The Bank of England's Monetary Policy Committee is set to meet this Thursday; markets will keep a close watch for any hawkish comments and any hints on tapering.
  • Gfk Consumer Confidence is to be released this Friday with its forecast at -7 for September versus -8 in August.


The Euro was not exempt from market pressures last week, and it fell 0.70% against the US Dollar as investors flocked to the safe-haven asset. Although the meetings of the Bank of England and Federal Reserve will be the focus of the week, the German elections on Sunday should be given some consideration. The polls are very tight as things stand, with no party expected to win a majority. Angela Merkel's replacement, Armin Laschet, is proving to be less favourable, which has only driven the Christian Democratic Union’s popularity lower. The likelihood of a coalition government between the Social Democratic Party, Greens, and Liberal Democrats could spell a bearish outlook for the Euro, with these parties being advocates for more fiscal stimulus. More data misses this week could reinforce the current dovish monetary policy stance by the European Central Bank—yet another bearish signal for the common currency.

  • German Producer Price Index m/m came in at 1.50% for August this morning versus 1.90% in July.
  • German flash Manufacturing and Services PMI’s will be released on Thursday and are set to read 61.3 and 60.3 respectively for September.
  • Eurozone flash Manufacturing and Services PMIs are also due for release on Thursday. The September figures are expected to come in at 60.4 and 58.4.
  • The German ifo Business Climate Index will be released on Friday and is predicted to fall, yet again, to 99.0 in September after reaching a three-month low of 99.4 in August.


The US Dollar Index gained 0.64% last week as Coronavirus conditions and China’s Evergrande contagion concerns hit global markets. Technology stocks led the sell-off, with the Nasdaq falling 1.10% as hawkish sentiment begins to build ahead of the next Federal Reserve meeting. US Treasury Secretary Janet Yellen spoke about the US debt ceiling over the weekend, emphasising the default on US debt would compound economic damage from the Coronavirus pandemic and trigger a record-breaking financial crisis. The debt ceiling currently stands at $28.5tn and although total default is considered by some as an unlikely outcome, the risk is still being felt in markets as the month draws to an end.

  • The FOMC will meet on Wednesday; markets are widely expecting the announcement of tapering asset purchases to be formally announced. Updated economic projections and the latest rate decision will also be released.
  • Thursday’s Unemployment Claims are forecast to fall to 317K this week from 332K in the week prior.
  • Flash Manufacturing and Services PMIs are due out on Thursday, with expectations of a 61.1 and 55.1 reading for September, respectively.
  • Federal Reserve Chairman Jerome Powell is due to speak 3:00PM this Friday at an online event hosted by the Fed.


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