RELIEF?: A big month for Europe’s politics just got even bigger. The old continent has a new Conservative UK prime minister, this weekend’s too-close-to-call Swedish election, and the right to win Italy’s Sept. 25 elections. Add to this the energy and cost-of-living crisis coming to a head after the Nord stream shut-off. There are no good policy options, but the coming big spending plans may be a relief to some hard-pressed markets. It will mechanistically cut inflation, prevent a deep recession, and we have likely seen the top for EU gas prices. See @EuropeEconomy.
GAS HELP: New UK prime minister Truss is to announce up to £150 billion, or 5% GDP, of spending to cap gas prices and help business. This may cut inflation around 4 points from peak and soften a coming recession. But at the cost of high-for-longer inflation and interest rates, and even more currency weakness. Big tax cuts above this would be a bridge-too-far for stressed markets, driving further GBP and bond price falls. The domestic FTSE 250 could see short term relief, whilst the global-focused FTSE100 is the world’s top performer and helped by weak GBP.
ITALY RISK: Fast rising up the agenda is Italy’s election. Giorgia Meloni is the front-runner to be prime minister of the conservative bloc. All have been promising large new unfunded spending in Europe’ most indebted major economy. This will keep the focus on Italy’s government funding costs versus Germany (see chart), as the EU’s perceived weakest big country link. This sets up the market to test the ECB’s recent anti-fragmentation resolve if these spreads near 2.5%. The silver-lining is its GDP is ‘only’ 12% of the EU, and its equities already the world’s 2nd cheapest.
All data, figures & charts are valid as of 07/09/2022