Investment Comment
26th August 2022
6 months on
Wednesday marked the 31st anniversary of Ukraine’s independence from the Soviet Union but also 6 months since the Russian invasion. Initial expectations of a short campaign based on superior a Russian military have proved unfounded and despite gains in the east and south of the country, Russian advances have ground to a halt. Similarly, despite some strong rhetoric it seems highly unlikely that Ukraine has the resources to drive back the Russian invaders.
Neither side has the immediate upper hand. Neither side has shown any lasting appetite for negotiations. And neither side is giving up. Ukraine has vowed to fight on until it drives Russia from its territory and the grinding conflict does not seem to have shaken the resolve of Vladimir Putin to seek victory, despite heavy battlefield losses and western sanctions that have crippled Russia’s economy.
The repercussions have been felt keenly across Europe with sharply rising gas and oil prices driving spiralling inflation that threatens to drive the continent into recession. Thus far European solidarity with Ukraine has been resolute despite the economic ramifications, although this will be tested if and when economic conditions deteriorate.
On a brighter note, while natural gas prices continue to surge as Russia reduces flow through the Nordstream pipelines (and there are talks of further “maintenance” breaks), there is a definite easing of price pressures in other commodities driven by weakening economic growth.
Gas prices surge to new highs but other commodities have fallen back
Source: Bloomberg
A “confusion” of economists
What is the collective name for a group of economists? A quick search suggests a deficit, a recession, a confusion, a gloom and other more “colourful” suggestions. Whatever the term, the good and the great of the economics world, central bankers, policymakers, academics and more, are gathering for the annual Jackson Hole summit to discuss the most important issues of the day. However, all eyes and ears are on one man, US Federal Reserve chairman Jerome Powell. The US has been at the forefront of tightening monetary policy with rising interest rates triggering concurrent selloffs in equities and bonds through the first half of the year. The rally in equity markets over the last two months has been predicated on a view that the Federal Reserve might prove less aggressive in their tightening as economic growth has softened. To that end there is significant interest in the words of Jerome Powell. Will the rhetoric match current expectations and support hopes of a soft-landing for the US economy? Or will he signal a more aggressive tightening of policy to tackle inflation, which would increase recessionary concerns and likely dent equity markets? The words and policy of the Federal Reserve will continue to have a huge influence on markets for the rest of the year.
Winter is coming
After months of waiting — and months of warnings — this morning Ofgem finally announced the new level of the household energy price cap that will come into effect from October. The average bill will increase to £3,459 a year, a rise of 80 per cent from the current level and not far off three times the level of £1,277 of October last year. As we’ve discussed previously, this does not even mark the likely peak in the price cap, with analysts forecasting further rises as a volatile and tight gas market mean prices could get significantly worse through 2023. This feeds directly into consumer inflation and the “cost-of-living” crisis that is and will impact so many, and which at an economic level is hitting consumer spending.
The same sense of crisis is building in the business market where the traditional renewal date of October 1st for fixed-price energy contracts is looming. New estimates by consultancy Cornwall Insight show that businesses looking for a new contract this autumn will have to pay more than four times the price they paid for their electricity in 2020.
Ofgem chief executive Jonathan Brearley said it was “clear the new prime minister will need to act further to tackle the impact of the price rises that are coming in October and next year”. Definitely top of the in-tray for the new prime minister when they arrive at their desk on September 5th.
Gareth Thomas, CFA Head of Investment Management
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