The noise
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The Bank of England announced that it expects inflation to peak at over 4% this winter with interest rates being held at 0.1% as the Monetary Policy Committee expects price rises to moderate next year. Voting unanimously to hold its main policy rate at the historic low of 0.1% in its September meeting, the bank’s Committee said that the economic recovery from Coronavirus had progressed sufficiently to start considering whether to end the emergency setting for interest rates for the months ahead.
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The unprecedented spike in natural gas and energy prices is forcing its way up Europe’s political agenda after hijacking a meeting of member states on the bloc’s ambitious transition to a green economy. Ministers from most of the region’s 27 nations, from Sweden to Greece, voiced concerns at their gathering in Slovenia on Wednesday about energy prices hitting all-time highs. Rates have soared just as the bloc’s economies are rebounding from the Covid-19 pandemic, which could slow down political talks about turning EU’s strategy to reach climate neutrality into reality.
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Biden and his French counterpart Emmanuel Macron had a "friendly" phone call on Wednesday to defuse a deep row over submarine sales to Australia, promising to meet in person to repair the transatlantic relationship. The call, which the White House said lasted about 30 minutes, was the first between Biden and Macron since France recalled its ambassador over the surprise US announcement of a deal to build nuclear submarines for Australia scuppering a previous French deal to sell conventional submarines.
The numbers
The nuance
The Federal Reserve indicated to markets that as long as the next few employment data points play out as expected, the tapering of asset purchases will commence as soon as November and finish around the middle of 2022. Whilst this is a step towards tightening and prompts investors to move their focus towards the timing of rate hikes, it is not yet material enough to change financial conditions which remain highly accommodating. The interplay between economic growth and inflation will remain important in deciding the exact path of monetary policy, and it remains to be seen which central banks will have the courage to raise interest rates.
The Chinese situation has been a catalyst for a mild selloff in equity markets as Evergrande’s turmoil progressed in the week. The deliberate and sustained pressure on China’s real-estate sector is being felt far beyond a single developer, as government policy continues to shrink the property sector. The Chinese have sufficient savings, reserves, and desire, to prevent systemic problems to the financial sector.
The risk of contagion to global markets is small, however the structural changes to the Chinese economy and the reduced growth potential will have lasting impacts on global demand for key commodities. Evergrande has been a catalyst for people to reconsider attitudes towards risk and valuations, prompting a dip in global markets though by historical standards a mild one as volatility at the index level remains subdued.
Equity markets have dealt with the modest course adjustment to monetary policy and now all eyes turn to the upcoming corporate results season starting in October where we gain greater insight into how companies are dealing with the persistent inflationary pressures on input costs, and the ability of the consumer to absorb price increases.
Quote of the week
“I just think it’s time for some of our dearest friends around the world to ‘prenez un grip’ about all this and ‘donnez-moi un break’”.
Boris Johnson
Boris Johnson’s latest attempt at speaking another European language has gone as well as you’d expect, with the Prime Minister being ridiculed for his French retort to criticism over the new UK, US and Australian partnership. The pact, often referred to as AUKUS, has sparked outrage in France, after a submarine deal with Australia was dropped in favour of the new security arrangement.
France’s foreign minister Jean-Yves Le Drian dubbed the move as “a stab in the back”, accusing Oz of “lies and duplicity”. However, standing outside the US Capitol building, Johnson brushed aside the complaints, telling the media: “I just think it’s time for some of our dearest friends around the world to ‘prenez un grip’ about all this and ‘donnez-moi un break’, because this is fundamentally a great step forward for global security.”
Source: The Telegraph
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