Market Watch 03.10.2021

SPD wins German election. The Social Democratic Party narrowly won the election with 25.7% of seats, making its leader Olaf Scholz the next expected German chancellor. Angela Merkel’s CDU party, now led by Armin Laschet, only won 24.1% of seats, the worst result in their entire history. Although it is not over yet, as the SPD failed to achieve an outright majority. Therefore, a coalition needs to be formed meaning Germany is heading towards a three-party government. Typically, the winning party has first rights to form a coalition, in this case the SPD needs to successfully form a coalition with the Green and FDP parties, or else the CDU will have their chance. It will likely be months before a government will be formed, causing markets to be very unresponsive to the result, with the DAX Index only having a slight gain of 1.1%.


Either way, a bumpy road lies ahead due to the differing opinions a three-way coalition creates. The next German government faces many challenges in Europe. Firstly, Europe set an ambitious goal to become carbon neutral by 2050. With Germany having a substantial auto industry, they have a complex job if the targets are to be met. Another task is finishing the Banking Union, the shift of power from national banking authorities to European-wide institutions, which began after the debt crisis. Furthermore, in 2022 the Euro Zone is expected to update its fiscal and debt rules, as many nations have a debt to GDP ratio greater than 60%, exceeding the EU’s recommended threshold. Scholz believes Europe’s fiscal rules are flexible enough and said the possibility of the EU raising debt in the future, is not a debate on the table.



Global energy crisis fuels prices. On Tuesday the price of oil climbed to a three-year record high, with Brent temporarily breaking through $80. The rally is being driven by increased consumer and business usage, as government restrictions from COVID-19 are lifted and Hurricane Ida created prolonged shortages out of the Gulf of Mexico. However, refineries are getting back on track as crude oil inventory increased by 4.6 million barrels last week. Goldman Sachs says, “The current global oil supply-demand deficit is larger than we expected”, because demand has recovered faster than anticipated. Goldman Sachs predicts the rally to remain and estimates Brent will reach $90 by the end of the year. Gas has not been immune to the crisis, causing UK prices to rise by 70% since early August. Typically, summertime is when natural gas storages are replenished from winter usage. However, 2021 storage filling has been far from ideal, as Russia has recently been sending less gas to Europe, for unknown reasons.


Russia might simply be replenishing its own storage, however theories include, pressuring European governments to agree to the disputed Nord Stream 2 pipeline. This problem has only been exacerbated from Brexit, which has caused a lack of truck drivers transporting gas from refineries. As a result, fears for the economy are mounting, because of the tight supplies as we approach winter. The rising prices could cease for a number of reasons. Firstly, less gas being used in electricity generation, could be achieved if wind generation increased or a switch to other hydrocarbon liquids took place where possible. The market would obviously calm, if we had a mild winter across the northern hemisphere. Foreign truck drivers have been issued with temporary visas, but the amount and speed of visa distribution would need to increase.



Biden’s landmark legislations locked in tense discussions. Biden’s whole presidency has been hinged on two bills: the $1.2 trillion bipartisan infrastructure bill and the $3.5 trillion investment in America’s social safety net. The Republicans have no issue and are in favour of the $1.2 trillion bill, which passed through the Senate with ease. However, Republicans are strongly opposed to the $3.5 trillion bill, and with only a tiny 8 vote margin, almost every Democrat must vote in favour of the bills to be passed through, but this is not the case. One of these Democrats and senior senator Joe Manchin, stated he “can’t support $3.5tn more in spending when we have already spent $5.4tn since last March. At some point, all of us, regardless of party must ask the simple question, how much is enough?” The Democrats’ plan is to hold back from voting through the smaller bill, until the larger one gets passed, something Bernie Sanders urged his colleagues to do.


On Wednesday Joe Biden and Democrats engaged in precarious negotiations, but it remains unclear if there are enough votes to pass the legislation. As next year’s mid-terms and the important Virginia governor’s election approach, fear is setting in for the Democrats, as failure to pass the bills would be a defeat and may topple their razor-thin majority.



Economics Calendar 4th October - 8th October


MONDAY

· Data: US Factory Orders

· Events: OPEC and Non-OPEC Ministerial Meeting, Euro Group Meeting


TUESDAY

· Data: RBA Interest Rate Decision, UK Composite and Services PMI, US Non-Manufacturing PMI, Australian Retail Sales

· Events: EU Meeting, RBC Rate Statement, BoJ Governor Speech


WEDNESDAY

· Data: New Zealand Interest Rate Decision, UK Construction PMI, US ADP Nonfarm Employment Change, Crude Oil Inventory, EU Retail Sales

· Events: ECB Non-Monetary Policy Meeting, FOMC Member Speech, China Holiday.


THRUSDAY

· Data: Canada Ivey PMI, US Initial Jobless Claims

· Events: ECB Publishing Accounts of Monetary Policy Meeting, FOMC Member Speech


FRIDAY

· Data: India Interest Rate Decision, US Nonfarm Payrolls, US Unemployment Rate, US Employment Change

· Events: UK FPC Meeting Minutes and Q3 Bulletin


Main Events


  • OPEC Meeting

The upcoming OPEC meeting is expected to shade some light on the recent price rally within the energy industry, as representatives from the 13 richest oil nations will discuss the global supply problem. The Monday’s meeting will cover the idea of boosting the production by 400,000 barrels per day in November and December.



  • ECB

On Thursday, the European Central Bank’s non-monetary policy meeting’s minutes will be published. Some key statistics that will be punitive to investors include the managing of gold and foreign exchange. Although this meeting will not include any further discussion about the interest rates changes, it will still offer some insights about the ECB ‘s plan to manage the new wave of coronavirus in the European block.



  • PAYROLLS

The US labour market will be the spotlight of the week, as the non-farm payrolls are expected to be released on Friday. Analysts estimate that the US economy will add around the 460,000 new jobs into the market, compared to the August reading of 235,000. As the surge in COVID-19 infections discourage companies from hiring new workers, August represented the lowest reading in seven months, well below the 750,000 forecasts. Non-farm employment has risen by 17 million since April 2020 but is still down 3.5%, from its pre-pandemic level in February 2020.



Thank you to Cameron Barker and George Fol for your in-depth analysis!

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