Keep the home fires burning

Log sellers have reported a 60% jump in demand compared to last year, pointing to a significant increase in the use of domestic wood stoves. Not surprisingly, this has been driven by the UK energy crisis, although given that stoves that use solid fuels are not great for air quality, would suggest that for some households, keeping warm this winter takes precedence over climate change.

However, European governments are having to make hard choices to keep the lights on and homes warm this winter due to Putin’s war in Ukraine and the sabotage of the Nord Stream gas pipelines. The EU is far more dependent on Russian energy than the UK and the International Energy Agency believes member states will need to cut demand by 13% over the winter months. Germany, the most exposed has already started to impose measures from lowering heating in public buildings to switching off shop lighting at night.

In the UK, National Grid has warned that in the ‘unlikely event’ of a shortage of gas supplies that some consumers would be without power for ‘pre-defined periods’, possibly up to three hours during the day to ensure the integrity of the UK’s energy network.

However, Ofgem has warned that there is a ‘significant risk’ of gas shortages this winter which could impact electricity supplies. If this happens, supplies would be cut to the ‘largest gas users’ such as gas-fired power stations. Ofgem has warned that this could result in the potential insolvency of gas-fired generators if a gas supply emergency occurs due to the energy providers having to pay ‘imbalance charges.’

The government is, not surprisingly playing down, concern about the UK’s energy supply this winter. However, following the ‘sabotage’ attacks on the Nord Stream pipelines, HMS Somerset a Type 23 frigate and survey vessel HMS Enterprise have been dispatched to patrol the Langeled undersea pipeline from Norway. This supplies 20% of the UK’s peak natural gas demand. At last week’s Conservative party conference Defence Secretary Ben Wallace warned of the risks to the UK’s undersea energy and internet infrastructure assets from ‘hybrid’ attacks. Has Russia already deployed remote mines? Given the UK’s military support for Ukraine would Putin opt for a further escalation with NATO? Let’s hope not but he does appear to be becoming increasingly more desperate and the attack on the Kerch bridge, his prestige project connecting Russia and the Crimea, will not have helped.

Regardless, many small businesses in the UK will be dreading potential power cuts this winter on top of the cost-of-living crisis and higher borrowing costs.

What have we been watching?

Good is bad and bad is good – Simples!

Markets remain volatile but did momentarily regain some composure at the start of last week as ‘bad’ economic news was interpreted as being ‘good’ news for investors. The risk rally briefly gathered steam on the hope that if global economic conditions deteriorate too much that central banks will ease up on interest rate hikes. However, at the end of the week ‘good’ economic news -positive US jobs numbers were considered ‘bad’ news for US equities as the data is unlikely to shake the Federal Reserve’s (Fed) ‘hawkish’ determination to hike US interest rates.

At the start of last week, The Royal Bank of Australia raised hopes that the path of central bank tightening may not be as steep as feared with a ‘dovish’ hike of 0.25% compared with forecasts of 0.5%. Despite Fed ‘monetary policy pivot hopes’, US interest rate futures are still pricing in a 65% chance of a 0.75% hike at the Fed’s next meeting. ‘Fed pivot’ hopes were dented towards the end of the week by stronger than expected US jobs data. Sterling drifted back to under $1.11 on the likely path of US interest rates. In addition, OPEC+ announced plans to cut oil output which besides driving up the oil price will raise political tension with the US.

The Ukrainian counter-offensive is showing no signs of running out of steam with more villages liberated in the Kherson region and Donetsk in the east. The US announced it was sending another $625m of military aid to Ukraine including more Himars rocket launcher systems. Moscow warned this ‘increases the danger of a direct military clash.’ Meanwhile, wheat and corn futures have ticked upwards on concerns about Ukrainian exports from its Black Sea ports as the current deal reached with Putin via the UN expires next month. The market mood was not helped by President Joe Biden warning that Putin is ‘not joking’ about the use of nuclear weapons and that the world is now at its highest risk of ‘Armageddon’ since the Cuban Missile Crisis in 1962.

In the UK, the Conservative Party appeared to be in turmoil amid claims at one point of a ‘coup’ to oust PM Liz Truss! The Conservatives remain a long, long way behind Labour in polling results. Despite some recovery in UK gilts, this is not translating into the mortgage market with lenders becoming more risk averse with a mortgage crisis now adding to the energy crisis for UK households. The average two-year mortgage rate breached 6% for the first time since 2008.Short Sterling futures are indicating a peak UK interest rate approaching 5.5%.

Mind you no wonder lenders have pulled offers from the market based on the mixed messages emanating from government. It looked as if the government was going to share the full picture behind the mini-budget earlier than the 23^rd November. Then Kwasi Kwarteng said that the UK fiscal statement will not be brought forward and the date remains 23^rd November! Just to add to the growing pressure on the new Chancellor, as another global credit rating agency Fitch, downgraded its credit rating on UK government debt from ‘stable’ to ‘negative.’ The Bank of England also revealed the seriousness of the LDI pension scheme ‘flash crash’ following the recent mini-budget. ‘Multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning. A large quantity of gilts, held as collateral was likely to be sold, driving a potentially self-reinforcing spiral and threatening widespread financial instability.’ Yikes! The Bank of England emergency support for the long-dated end of the UK gilt market is due to end later this week although the central bank has tried to calm markets by suggesting that it remains on stand-by.

The US ISM manufacturing index slipped to 50.9, its lowest level since mid-2020. New business orders fell back into contraction territory while exports continued to drift lower. The US JOLTS report showed the biggest decline in job openings since the initial Covid-19 pandemic. US jobs data for September was better than expected with an increase of 263,000, suggesting the Fed will remain on its ‘hawkish’ interest rate hike path.

China’s Caixin services PMI activity indicator showed the sector’s first contraction since May with a reading of 49.3 reflecting the country’s zero-tolerance Covid-19 policy and further regional lockdowns.

Brent oil jumped to $98 as OPEC+ announced a significant output cut to bolster oil prices. From November, production will be cut by 2million barrels a day – the biggest cut since the global pandemic.

Finally, just when you think it can’t get worse. Millions of Christmas turkeys could be at risk from bird flu. The Chair of the NFU Poultry Board has warned that if it gets into turkeys that it could cause carnage and real supply chain issues in the run-up to Christmas. Some 48million birds have been culled across the UK and EU over the last year as a result of the largest avian flu outbreak on record. Looks as if it’s just not the turkeys being stuffed this Christmas!

Read Last Week’s Alpha Bites – What a Carry On

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Keep the home fires burning

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