Targeting Civilians

President Vladimir Putin’s blitz of missiles against dozens of civilian targets in Ukraine, including critical energy infrastructure, marks a major escalation as he tries to overcome a string of humiliating reverses. Russian officials and Kremlin allies cheered Monday’s strikes, which hardline nationalist voices had been urging, as Putin warned of more attacks if Ukraine continues what he called “terrorist acts” on Russian territory. The European Union denounced the missile strikes as “war crimes” and French President Emmanuel Macron said they reflected “a deep change in the nature” of the war.

Gilts Woes

UK bonds slumped after the Bank of England’s moves to increase emergency backstop measures failed to reassure the market, suggesting there’s plenty more chaos in store for traders. Inflation-linked debt was the worst hit ahead of a bond sale, with the yield on 10-year inflation-linked bonds rising 64 basis points to 1.24%. That was more than double the size of the move in conventional debt and a record in data going back to 1992. Investors are dumping UK assets once again after a selloff that started in late September on concerns about the new government’s fiscal policies. While the BOE announced new measures to ease the pressure on pension funds caught up in the rout, it also confirmed its first program of emergency purchases would end as planned on Oct. 14.

Fuel Shortages

France’s drivers face more fuel shortages as unions plan to prolong strikes at the country’s biggest refineries that have left almost a third of its gas stations with supply shortfalls. Following unsuccessful wage talks on Monday with the management of Exxon Mobil, which operates two refineries in the country, the CGT labor union that’s leading the walkouts urged the government in an open letter to mediate. Workers at the TotalEnergies refinery in Normandy have also decided to prolong the strike until at least Tuesday, the union said. The government of President Emmanuel Macron and the companies are under pressure to end the stalemate as long lines at gas stations continued to make headlines.

Xi´s Dream at Risk

At the once-every-five-year Communist Party congress this month, where President Xi Jinping is set to secure rule until at least 2027, policies on the table will help determine how quickly China surpasses the US economy, or whether it ever will. Bloomberg Economics has sketched out four scenarios for China’s economy over the decades ahead, with a base case of 4.6% growth on average over the next decade. Their model suggests a growth rate above 5% over that time period — as predicted pre-pandemic — is now out of reach, due to the lasting impact of Covid Zero policies, a faster decline in fertility than previously expected and lower investment due to a gradually shrinking real estate sector.

Retreating from Treasuries

Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat. From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month. For every one of them to pull back is an undeniable source of concern, especially coming on the heels of the unprecedented volatility, deteriorating liquidity and weak auctions of recent months.

Coming Up…

European stocks are set to follow Asian and US equities lower amid concerns over interest rates and geopolitical tensions. The IMF publishes its World Economic Outlook and Global Financial Stability Report. Ukraine will halt exports of electricity from Tuesday after Russian strikes hit power facilities. Facebook parent Meta holds a conference on augmented and virtual reality. BOE’s Andrew Bailey and the Fed’s Loretta Mester speak at events. Expected data include UK unemployment and Italian industrial production. LVMH and Givaudan report sales results.

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(Source: Bloomberg, Oct. 11-2022)