Multi-Manager People’s Perspectives

Multi-Manager People’s Perspectives

It’s been another busy week in financial markets with the focus firmly on Europe thanks to the European Central Bank (ECB) meeting, political dramas in Italy and questions over whether Russia would restart the Nordstream gas pipeline into Germany after a planned maintenance shutdown.

The ECB meeting yesterday saw the first rate hike since for over a decade with rates increased by 50 basis points – back to zero. This compares to inflation in June at 8.6%. The hike from the ECB ends 8 years of negative interest rates and contradicts the forward guidance given by the ECB at their previous meeting when they said they would hike by 25 bps. However, it was not a surprise thanks to some well-placed stories with Reuters and Bloomberg earlier in the week suggesting that the ECB was considering a larger rate hike. The ECB also announced a “Transmission Protection Instrument” so we can add ‘TPI’ to our financial markets book of acronyms – this is basically a tool to ensure that government borrowing rates do not diverge too far between individual countries in the currency bloc. For example, German Government bonds currently yield 1.19% while Italian bonds yield 3.53%. There is no explicit level for intervention, but the ECB give broad parameters, saying it will be “activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area”. The ECB also indicated that purchases could be unlimited, stating that the “scale of the TPI purchases depends on the severity of the risks facing policy transmission”.  This announcement was also widely expected, how and when it is used is another matter, but it does give the ECB another policy tool to keep a lid on spreads between individual countries borrowing costs.

I mentioned last week the deteriorating state of Italian politics – yesterday saw Prime Minister Mario Draghi resign for the second time in a week; this time his resignation was accepted by President Mattarella, who dissolved Parliament with elections set for September 25th. Draghi told Parliament earlier this week he had been persuaded to stay on, and while he won a confidence vote, the abstention of several parties in his coalition meant that the government had no future. Ironically the two parties that have brought the party down, Lega and Five Star Movement, are likely to see significant losses in the elections should the opinion polls prove to be accurate. Draghi had overseen a relatively stable period in Italian politics with his government having lasted 18 months – the average tenure of a government in Italy is more like 15 months with the country having seen 132 governments in the 161 years since Italy was unified in 1861. In the short-term Draghi will stay on as caretaker but the reforms under his leadership are likely to stall, possibly leading to delays in the disbursement of €200+ billion in EU recovery funds.

The Nordstream pipeline shutdown and reopening has been a significant area of focus in financial markets in recent weeks with a large question mark hanging over whether the Gazprom owned pipeline would reopen, and if it did reopen how much gas would be flowing through it. Remember that this pipeline in normal times sees the highest volumes of gas flows from Russia to Germany. President Putin told the media that the pipeline would reopen but at a “drastically reduced capacity”. Flows had fallen significantly before the shutdown; this was blamed on “technical reasons” by Gazprom but was seen as being driven by politics in the view of German leaders. Yesterday we saw the pipeline reopen at around 40% of capacity – this would likely be enough to allow EU countries to fill up storage capacity ahead of the winter and meet current demand though Russia has already noted that flows may fall further, to around 20% of capacity, if key components that may be subject to sanctions are not delivered in the next week. With concerns that Russia will ‘play politics’ over gas supplies in the coming months, the EU recommended that from next month countries reduce their gas consumption by 15% through to next March. With households legally exempted, the burden will fall on industry, though these reductions are ‘voluntary’ so we may well see little impact for now, but these could become compulsory should gas supplies be cut off. In the short term, it is positive to see flows restart but we are likely to see energy shortages remain on the agenda through the European winter; Gazprom declaring ‘force majeure’ on contracts and saying they cannot fulfil supply obligations due to “extraordinary circumstances” suggests this story far from over.

In UK politics, Conservative Members of Parliament continued a series of votes to choose the final two candidates to be new party leader, and Prime Minister. Rishi Sunak and Liz Truss will now begin several weeks of campaigning among around 160,000 Conservative party members, who will vote on their choice for leader. Results will be known on September 5th. The accuracy of the polls should be questioned but they suggest a substantial lead for Truss over Sunak at this stage. In the coming weeks we will learn more about the intended policies of each candidate, with some divergence to the right expected from the policy agenda of the Boris Johnson era. Liz Truss has questioned the role of the Bank of England, with the Bank being positioned to take the blame for high inflation in the UK. The Bank certainly has a role in this given the amount of money printed in the past decade and their tardiness in recognising inflation was not transitory last year but bringing politics back into monetary policy as it was pre 1997 would be a significant step backwards.

In the economic numbers, we’ve seen the UK report employment and inflation data. UK CPI was 9.4% year on year in June, pushed higher by fuel prices, which were up 9.3% month on month. The petrol price was up by 18.1pence per litre between May and June. Inflation was higher than expected, and producer prices data suggested that inflationary pressures were still high, with output prices rising by 16.5%, a 45 year high, and input prices rising by 24%, suggesting that margins may well also be under pressure. The UK unemployment rate was unchanged at 3.8% though payrolls increased by 31,000 in June, some way below the 68,000 expected. Wages in real terms fell by the biggest amount on record, down by 3.7% in the three months to the end of May. Ahead of the inflation data, Bank of England governor Andrew Bailey raised the possibility of a 50 basis point interest rate hike, saying the Monetary Policy Committee had an “absolute priority” to bring inflation down to their 2% target; he said that in simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet”. Bailey noted the risks to inflation remained to the upside,and said that the time was also right for the MPC to discuss selling down Gilts purchased during recent periods of quantitative easing with a range of “something in the region of £50-100 billion in the first year”.

A reminder that Scott and I presented a webinar yesterday covering performance over the first half of 2022 and our positioning for what we expect to be a volatile second half of the year. You can listen to the replay here.

That’s all from me for a little while now as I am off to enjoy my much-delayed Easter 2020 holiday! The updates will return on Friday 26 August. In the meantime, have a very enjoyable summer!

22 July 2022
Anthony Willis
Anthony Willis
Investment Manager
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Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.


Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

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