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November 2022 | Issue 250
Opinion Welshcake

Forget the World Cup, the macro-economic catastrophe cup has more well-matched contenders

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Government bonds are rallying in some quarters, but the odds are on more stress feeding into credit
November brings the build-up to an incredible spectacle in which nations around the world compete for the highest honour — grabbing headlines in the next leg of the global economic meltdown.
Not everyone is excited about the Fifa World Cup taking place at an odd time in a country with an even odder regard for human rights. But I doubt that will deter my well-disciplined compatriots from supporting Wales in its second ever appearance — and of course obeying the UK foreign secretary’s advice they be “respectful of the home nation”. Yes, the Welsh flag just happens to be red, orange, yellow, green and blue.
In contrast, the macro-economic catastrophe cup should command everyone’s attention. Who will get the golden boot is anyone’s guess, with so many well-matched contenders, but one way or another it looks sure to drop.
As with the World Cup, this will partly be a knock-out competition. At time of writing Brazil is a heavyweight in the world of unknowns, given the close-run and deeply divisive presidential election. But its future political direction should be decided by time of reading.
Likewise, the 27 October ECB policy meeting will be out of the way, followed quickly by the US Federal Reserve 2 November decision. Central banks’ ability to conjure volatility cannot be overstated, but each raising of the stakes also takes reality closer to perceived terminal rates — leaving less (seemingly) to price in. Markets to a large extent have already been reflecting over-assurance in doing just that.
Stakes are high in the mid-terms
In the US, there is the small matter of the mid-term elections. And while historically they have often been a prompt for a period of rallying, the extent of improvement in spreads this October sets up the prospect of November proving non-compliant with tradition.
Moreover, it still feels like the US housing market is an overlooked adversary. Few gave credence to the first part of this downturn before it was on them, but the second part could bring even more of a shock. A cocktail of fast declining mortgage approvals, buying demand and rental value points to the problems of the western states spilling over to the as-yet resilient east, beginning with places like Florida, but spreading even up into the north.
Italy isn’t featuring in the World Cup, but it likewise remains an overlooked powerhouse in the macroeconomic breakdown. Again, the country’s rallying government bonds and credit spreads stand at odds with signs the ruling coalition is already a picture of deep fragmentation, with Silvio Berlusconi having reminded us what a fine friendship he has with Vladimir Putin.
More unsettling still would be the dawning realisation Italy is on a better footing than Germany, which faces imminent recession and severe power shortages over the winter. It is paying eight times higher gas prices than usual because it does not have sufficient reserves. The country is looking at loans of up to €200 billion to control soaring energy prices.
Russia is also absent from the Qatar tournament. But economically it is reaching its own turning point, with the country’s military mobilisation driving millions of people to abscond from their homes and jobs to avoid conscription. Economist Vladislav Inozemtsev has predicted Russia’s economy will “die by winter”, taking with it Putin’s regime.
From the Russian downfall to the Trussian. A month ago, the markets punished UK political chaos — but are now rewarding it. Rishi Sunak’s election as the third prime minister of the year is estimated to have saved the treasury £7 billion a year in gilt payments. Yet the markets rally as the 31 October financial report — on which all stability seemingly hung — has been delayed till after the Bank of England decides the next rate hike. They even rally as Sunak shreds his message of integrity and accountability by reappointing Suella Braverman as home secretary, just days after she resigned over a serious breach of security.
One can only do as a Welsh first minister did and say, “Llongyfarchiadau Rishi” — and then wonder why markets around the globe have been enjoying similarly congratulatory sentiments.
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Global credit funds & CLO's
November 2022 | Issue 250
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