Replacing Truss

The UK’s Conservative Party is desperate to draw a line under Liz Truss’s disastrous premiership, with a rapid leadership contest aimed at trying to give the winner a shot at overturning an unprecedented deficit in the polls. A maximum of three Tory MPs will be able to run and the next leader could be decided as soon as Monday. In what would be an extraordinary twist even by recent standards, supporters of former Prime Minister Boris Johnson have begun “Bring Back Boris” calls for him to replace his successor just months after he was ousted himself. Meanwhile, regardless of who wins the race,  the pound is set to keep falling, according to market players who see sterling continuing its descent as economic headwinds and the Bank of England’s policy stance act as a drag. 

Energy Steps

The European Union agreed to press ahead with a set of emergency actions to address the bloc’s energy crisis, with Germany yielding to pressure from other member states to pave the way for a temporary price cap on natural gas prices. After hours of intense negotiations, the leaders asked the EU’s executive arm to propose a “temporary dynamic price corridor on natural gas transactions to immediately limit episodes of excessive gas prices,” they said in their joint summit conclusions. They also said they would pursue a temporary framework to cap the price of gas in electricity generation, including a cost and benefit analysis. Countries including France, Italy and Poland had been pushing hard to limit the cost of gas, which is roiling economies and fueling inflation as the region heads for a winter with drastically reduced shipments from Russia after its invasion of Ukraine. 

Dealing With Musk

Biden administration officials are discussing whether the US should subject some of Elon Musk’s ventures to national security reviews, including the deal for Twitter Inc. and SpaceX’s Starlink satellite network, according to people familiar with the matter. US officials have grown uncomfortable over Musk’s recent threat to stop supplying the Starlink satellite service to Ukraine — he said it had cost him $80 million so far — and what they see as his increasingly Russia-friendly stance following a series of tweets that outlined peace proposals favorable to President Vladimir Putin. They are also concerned by his plans to buy Twitter with a group of foreign investors. The discussions are still at an early stage, the people familiar said on condition of anonymity. 

ECB Rate Peak

The European Central Bank will act much more forcefully than previously anticipated to rein in record inflation, even as the euro zone succumbs to a recession, according to a survey of economists. The ECB’s deposit rate is expected to reach 2.5% by next March, more than the 1.5% foreseen in an earlier poll. That advance includes a 75 basis-point hike on Oct. 27, and another 50 basis-point step in December. The survey suggests that a downturn in the 19-nation euro-area economy won’t prompt a halt in rate increases, whose ferocity has begun to match that of the Federal Reserve, despite kicking off four months later.

Coming Up…

European shares are poised to retreat as Treasury yields held at their highest since the global financial crisis. EU leaders meet for day 2 of their summit, with economics on the agenda. The Bank of Italy releases its quarterly economic bulletin, while data include UK retail sales, Sweden unemployment. Analysts and investors are watching for continued signs of robust loan growth when American Express reports results. Sika, Telia and Verizon are also on tap for earnings.

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(Source: Bloomberg, Oct. 21-2022)