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It’s been an unsettling few days since the news of Her Majesty’s passing. The coming days, weeks and months will be of huge consequence for the country as it wrestles with the twin economic and constitutional battles with two new hands at the helm. A new prime minister with radical economic policies was installed in the same week as the new King; unusually unsettling times for sure. Many questions remain on both fronts and for both leaders. Whilst the moving scenes of Her Majesty’s procession through Scotland and its resplendent capital seem to dim the flame of independence, the movement laid to rest in St Giles with the Queen, in some ways it only casts the debate into a sharper relief. There is, after all, still a small parliamentary majority in the Scottish chamber in support of independence. The Crown of Scotland placed on her coffin dates from when Scotland was a sovereign nation; a symbolism hard to ignore. The King’s address to the Holyrood parliament yesterday was constitutionally important and sensitive to the political reality; his visit to Northern Ireland today underlining how much store is placed on the monarchy’s role in the Union, and all that it entails for the political and economic life of Ulster post-Brexit. Mourning and introspection will soon give way to thoughts to the future, hopes and fears in equal measure, as the economic battles take the centre stage once more: a mini-Budget and the delayed Bank of England decision follow shortly after the late Queen’s funeral on Monday, as if to emphasise the acute economic situation can only be tackled with a new beginning. Economic uncertainties are not the worry of the King, yet it was the steadfastness of the Queen through so much economic and political turmoil of the last 70 years that was so vital to the people. The role of the King in this uncertain future will be no less important than that of Her Majesty’s in the preceding decades. GSTK.

Markets, though, don’t stop, and it’s a case of so far, so good for September: equities have rallied strongly over the past few sessions in what we can only really describe as a bear market relief rally. The FTSE 100 rallied 1.7% on Monday to extend gains from last week that has seen it bounce 5% from its early September lows. The DAX also rose 2.4% yesterday to take its MTD gain to something approaching 7%. The S&P 500 now sits at a key level around 4,125, almost 6% higher. Stocks in Europe traded modestly higher early on Tuesday 

So, solid gains for the major indices thus far despite very hawkish central banks. Markets could be pinning the hope on inflation pressures beginning to ease with today’s US inflation data. After rising 1.3% in June, CPI was unchanged in July at an annual rate of 8.5%. With US energy prices cooling, investors will be looking for further signs of a slowdown in inflation and what this could mean for the Fed’s hiking cycle. Specifically, how jumbo is next week’s rate hike? The risk for equities is that even if inflation does moderate over the course of the year, it won’t deter the Fed from further tightening. US Treasury yields are pretty steady ahead of the CPI release, with 2s at 3.55% and 10s at 3.33%.  Expect markets to see rates steepening as they realise yields are going to be higher for longer. Remember QT is doubling this month to $95bn so liquidity becomes negative and could be problem if volatility increases.

Over in Europe, German consumer prices rose 0.3% month-on-month in August, down from 0.9% the previous month, though annual CPI rate rose to 7.9% from 7.5%. The euro trades firmer on the session this morning though still some way off yesterday’s intraday high just a whisker under 1.02. The breach means the 50-day line offers support for now but long-term trend resistance is a powerful barrier – breach here could release a burst higher (see chart below).

The UK economy returned growth returned in July, with GDP expanding by 0.2%, after contracting by 0.6% in June. This was, however, less than expected and the lacklustre growth rates are a headache for the government. As is the widening trade deficit, which rose to almost an all-time high £27bn in the three months to July. Kwasi Kwarteng, the new chancellor, has told the Treasury to focus entirely on growth and we can expect fiscal loosening to be at the heart of the upcoming mini-Budget. That won’t help the other half of the UK’s twin deficit and it could lead to further re-pricing for sterling. Citi (h/t Andy Bruce at Reuters): “Fiscal and external risks are now, in our view, a first-order concern … Further cross-market cheapening seems likely,” and: “It is not at all clear in our view the external picture will be sustainable without some more extensive price adjustments.” 

But markets may be prepared to look through an increase in short-term borrowing, deficit widening etc if it means the holy grail of productivity growth can be levered. If this – higher productivity and much higher long-term growth rate of 2.5% – can be achieved, the pound has a healthier longer-term outlook. For now, sterling is enjoying the risk-on relief rally, too, which has seen the dollar move sharply lower just as equity markets rally. GBPUSD has broken out of its longer-term trend to the previously mentioned resistance point at 1.1710 – next up is 1.1880 area should the buyers maintain momentum. We have seen this trend broken recently and this produced a double-top failure and the downtrend resumed.

EURUSD – key trend resistance met, 50-day offers support for now.

DXY – steps higher, support in view

Elsewhere, Twitter shareholders are said to approve Musk’s offer to buy the company in the teeth of his protestations. Shares currently trade around $41, well short of the proposed transaction fee, implying the market still sees Musk wriggling off the hook. Musk’s latest stab at escaping the deal is to argue that whistle-blower payments breach terms. 

Ocado shares fell sharply after it missed expectations, lower full-year guidance for sales as it warned that basket sizes have slackened. Marks & Spencer shares fell 3% in sympathy and other delivery/retail stocks caught a bit of the blowback. No surprises that the cost of living problems is seeing consumers cut back on groceries, particularly on the more premium end where it is easier to trade down to a cheaper brand. Sales are not the only problem for Ocado – profitability is coming under pressure from rising costs, particularly energy. Only in May Ocado warned that sales growth would be about half what it had anticipated due to the cost of living crisis and a bigger return not the office….as we always point out, profit warnings seldom come alone and usually at least one more follows shortly after. Just as well they are a tech business with lots of international fees to offset… 

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