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It has been a week dominated by political events. The UN General Assembly in New York has been the focus, with meetings and speeches generating headlines along with the summit between President Trump and Chinese President Xi Jinping in Washington yesterday. Trump described talks at the White House with President Xi as “great” though there were no substantial announcements. President Xi said the two countries “stand to gain from co-operation and will both lose in confrontation”. Xi called for “healthy competition that is kept within bounds”.
President Trump told the UN General Assembly that the US expected to reach a peace deal with Iran but warned that he faced a “big decision” over escalating the conflict. Trump said “I believe we will make a deal right after the [midterm] elections.” US and Iranian officials held their first talks since June with three hours of indirect talks via mediators which Trump described as “very productive”. In the past 24 hours there have, potentially, been more positive developments, with reports US and Iranian negotiators are “exploring” a phased deal that would see Iran reopen the Strait of Hormuz, and the US lift their naval blockade of Iranian ports. A sequenced deal would be similar to that agreed under June’s Memorandum of Understanding, which collapsed in a matter of weeks.
President Trump said the US had entered into an agreement with Denmark and Greenland giving the US “permanent control over security and all other needs” in the territory. Officials from the US, Denmark and Greenland signed a deal strengthening security in the Arctic and North Atlantic on the sidelines of the UN General Assembly in New York this week. Danish Prime Minister Mette Frederiksen said the deal recognised Denmark’s sovereignty and territorial integrity along with Greenlander’s right to self-determination. The deal broadly reaffirms existing agreements but removes concerns that peaked in January this year the US would take more forceful action to secure Greenland, undermining the NATO alliance as a result.
By the numbers
The Financial Times reported that that the number of countries introducing fuel subsidies to protect consumers from rising prices has more than doubled over the past four months, to 38. The overall number of countries with some form of consumer support has risen to 94. France has recently extended support for high mileage drivers due to end this month, while Germany has promised new measures “very soon”. UK Prime Minister Andy Burnham may outline support for low-income households in his major speech on the economy next month. UK household energy prices will rise by 4% next month, followed by an estimated 26% rise in January, with the final figure determined by wholesale prices up to mid-November. French President Emmanuel Macron said G7 countries would meet soon to discuss the release of more strategic oil and fuel reserves.
Market Movers
Oil and gas prices have been on a round trip this week, firstly easing on optimism on a breakthrough in the stalemate between the US and Iran and then climbing on a perceived lack of actual progress. The signalling by Saudi Arabia that the East-West pipeline would see flows resume by the end of this week was positive step, though it remains unclear how quickly the 1200km pipeline will return to its full capacity of around 7 million barrels/day. Further down the supply chain however, stresses are visible, most notably in US diesel prices, which have hit record highs on multiple days this week. US diesel prices are up over 70% since the start of the US-Iran conflict. While just enough oil may be getting out of the Middle East (combined with inventory drawdowns) the same cannot be said for oil refining capacity – impacted both in the Middle East and by recent attacks on Russia by Ukraine. Current ‘crack spreads’ (the price difference between a barrel of refined diesel and a barrel of brent crude are over $100 which is the highest on record – the average level over the past decade is more like $25/ barrel. Hence while we are seeing a decline in headline crude pricing, the limited refining capacity globally continues to cause issues – US refiners are operating at maximum capacity but with some Russian and Middle Eastern refineries offline, supply difficulties for refined prices will continue to be reflected in higher prices. The issue for the US inflation outlook will be the passing on of higher transportation costs to end consumers, and the impact on inflation. The issue is not unique to the US but may well become exacerbated if the US moves towards controls on exports of refined products, as has been mooted by President Trump and Treasury Secretary Scott Bessant in recent days.
The Investment Lens
While the inflation outlook remains foggy, there is more clarity on the wider economic outlook, with the flash PMI data released this week highlighting continued resilience across the UK and eurozone. This is despite continued geopolitical headwinds and elevated commodity prices boosting expectations of higher interest rates in the future. The strength of the eurozone numbers brings forward the potential next rate hike to October rather than December, and it’s a similar story for the UK, where the PMI data continues to hold up, with few signs of a pre-budget ‘pause’ in activity as we have seen in the past couple of years. The PMI strength was also spread across both services and manufacturing, a contrast to what we have often observed with the services sector doing the ‘heavy lifting’ while manufacturing struggled. The US data was even stronger, suggesting the economy is growing at an annualised pace of 4% this quarter – good news but not so good for interest rate expectations, with the PMI data pushing up expectations for an October rate hike to a 70% probability, and driving bond yields notably higher.
The PMI data is indicative of major western economies holding up well despite the increase in middle eastern tensions. A stronger economic backdrop, which will further drive upwards price pressures, does however bring about further risks of tighter monetary policy. But if we do see the heightened optimism over a US and Iran deal for Hormuz easing pressure on energy prices, then concerns over the pace of hikes may well dissipate leaving the overall backdrop very supportive for risk appetite.
