Liz Truss named UK Prime Minister

• Liz Truss is set to become the new UK prime minister today after beating Rishi Sunak in the Conservative Party leadership contest. The result was closer than expected, at 57% to 43%, but the winner was in the end the widely anticipated one. In her acceptance speech, Truss reiterated her commitment to tax cuts, but she has outlined plans to deal with the looming energy crisis. The incoming administration will look to cap the average household energy bill below the current GBP 1,971 through scrapping the current pricing regime and using a new unit price set by the government. The plan is expected to cost more than GBP 100bn but would avert the further rises in energy prices currently anticipated and would keep inflation from hitting some of the more eye watering forecasts of recent months.
• As the new prime minister takes office, the UK saw a negative reading on its composite PMI reading for August on the final reading. The index came in at 49.6, down from the initial reading of 50.9 and marking the first sub-50.0 result for the survey since February 2021, when the country was under a Covid-19 lockdown. Demand for consumer services such as restaurants is falling as high inflation bites, while financial services are facing a slowdown as interest rates rise.
• OPEC+ pledged to make a symbolic cut of 100,000 b/d to its output in October, essentially winding back the modest increase in production that is scheduled for this month. The move sends a signal that the producers’ bloc is prepared to intervene to support prices.
• Turkish CPI inflation came in broadly in line with expectations for August as it rose to 80.2%, up from 79.6% in July and just below consensus projections of 81.2%. Prices were 1.5% higher than the previous month. As elsewhere, food and energy prices have been a major driver of the elevated inflation rate in Turkey, but loose monetary policy and a depreciating lira has also fuelled rising core inflation, which rose to 66.1%, up from 61.7% in July. The latest rise in inflation has pushed real interest rates even deeper into negative territory following the 100bps cut to the benchmark one-week repo rate in August.
• Qatar’s headline PMI reading fell to the lowest levels since June 2020 as it dropped to 53.7 in August, compared with 61.5 the previous month. Business optimism remains high as the FIFA World Cup approaches. Meanwhile, Lebanon’s PMI reading turned positive in August for the first time in the series to 2013, coming in just above the neutral 50 mark at 50.1, indicating a marginal expansion in the private sector as compared with the previous month.

Today’s Economic Data and Events

• 08:30 Australia RBA central bank decision. Forecast: 2.35%
• 18:00 US ISM services index, August. Forecast: 55.4

Fixed Income

• US Treasury markets were closed at the start of the week thanks to a public holiday in the US. This morning they have started the day slightly weaker with the 10yr UST yield up 2bps to 3.208%. In European markets, bonds closed weaker. Bund yields added 4bps to 1.556% as the suspension of natural gas flows from Russia takes its toll on the economic outlook for the Eurozone. Gilt yields moved lower over much of the day but then bounced back later in the session to record a 2bps gain at the end of trading, settling at 2.934%.

FX

• Currency markets closed with modest changes overnight though that disguised some wide intraday volatility. EURUSD dropped to as low as 0.9878 early in the day before recovering and managing to temper its losses to 0.25%, settling at 0.9928. USDJPY continued to propel higher, rising by almost 0.3% to 140.60.
• GBPUSD showed little apparent reaction to the selection of Liz Truss as the new Prime Minister of the UK, as had been widely expected. Nevertheless, GBPUSD managed to stabilize a bit by the close of the day, up slightly less than 0.1% to 1.1517.
• Commodity currencies were weaker across the board although the losses were relatively muted by the standard of recent days. USDCAD added 0.06% to close at 1.3142 while AUDUSD fell by 0.2% to 0.6797 and NZDUSD dropped by 0.1% to 0.6095.

Equities

• European equity markets were weighed down by the deteriorating growth outlook yesterday as concerns over energy supply heightened. Germany’s DAX, which is particularly exposed, fell -2.2%, while France’s CAC dropped -1.2%. The UK’s FTSE 100 managed to secure a gain of 0.1%, led by energy firms on the back of the OPEC+ announcement while other sectors struggled, but plans announced to deal with the energy crisis could help provide some support today.
• In the US, the Dow Jones and the S&P 500 dropped -1.1%, while the NASDAQ lost -1.3%.
• Locally, the ADX dropped -0.7% and the DFM -1.2%. In Saudi Arabia, the Tadawul lost -0.8% and Egypt’s EGX30 added 1.8%.

Commodities

• Oil prices rallied in response to OPEC+ agreeing to cut production by 100k b/d for October levels, reversing some of the losing momentum recorded last week. Brent futures settled at USD 95.74/b, up 2.9%, while WTI is rising this morning, up by 2.3% after no settlement overnight thanks to the US public holiday.
• The OPEC+ cuts are modest and likely to be easily achievable given that many countries in the producers’ alliance are already failing to hit their output levels. But the main takeaway should be that OPEC+ is prepared to intervene to keep oil prices from falling too much. Should a negative flow of data or news weigh on oil prices again, markets should expect to see more intervention to protect the downside in oil.
• Elsewhere the prospects of a restart of the JCPOA look to be worsening as European Union officials have said they are losing confidence in whether a deal can be achieved. This follows on from the US which last week refereed to Iranian proposals as “not constructive.”

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