Politics: the only show in town

Contrary to a very quiet period towards the end of summer, recently markets have moved a bit more freely. Macro surprises are in short supply, however, and it seems that the political environment, dominated as it is by the US election, Brexit and OPEC, is creating bountiful news flow and moving markets of late. Other political events have also been noteworthy such as the German government’s intervention, or lack thereof, to take the pressure off Deutsche Bank and the US House Financial Services Committee’s grilling of Wells Fargo CEO John Stumpf following a false account scandal at the bank, but the focus this week is on the US, the UK and OPEC.

The inaugural Clinton / Trump debate took place last week. For those expecting an explosive show, the apparent attempts of Donald Trump to come across as ‘statesmanlike’ may have made the event something of a damp squib, but it was still a lively spectacle that drew in a record audience of 83 million in the US. What the event did highlight starkly is the gulf between the candidates in terms of their approach, outlook and style; however it did little to highlight the nuanced differences in policies between the two. Polling post the debate suggests that Hilary Clinton won the day, but in this topsy turvy world where Donald Trump confounded expectations to be the republican nominee, it still seems a little na?ve to write him off completely. It has been obvious for some time that these are very polarising candidates and as a result it is unsurprising to hear that approximately 10% of voters are still undecided. As a result, there is still a chance that the bombastic showman can play to his strengths in the coming two debates and throw Hilary off balance but on the evidence of the first debate, as long as Hilary sticks to her game plan she will be OK, whether that ends up being reflected in the voting is of course another matter.

Meanwhile in the UK, Prime Minister Theresa May confirmed over the weekend at the Conservative Party conference that the invocation of Article 50, which sets into motion the two year process for the UK to extricate itself from the EU, will take place next year, by “no later than the end of March”. In early trading on Monday 3 October following the speech, sterling has come under some pressure, but the moves are relatively modest. Positives that can be drawn from the weekend’s speeches include the fact that, while the 1972 European Communities Act (which gives direct effect to EU law in Britain) will be repealed, concurrently all existing European laws will be incorporated into UK legislation. This should provide a degree of certainty to businesses over the interim period as the UK works to leave the Union. Mrs May believes that this will set the UK on the path to being a “fully independent, sovereign” nation.

Last week’s OPEC meeting in Algiers ended with a surprise agreement between members to cut output to between 32.5 million barrels per day (bpd) and 33.0 million bpd from current levels of circa 33.5 million bpd, with details to be finalised at a policy meeting in November. This led to oil temporarily moving above $50, still below half of the levels of June 2014. Questions remain over whether the production limit is enforceable but regardless it shows a willingness of member countries, and Iran and Saudi Arabia in particular, to agree to a concerted effort to support oil prices, which is a big step. This change of tack for OPEC suggests that the cartel’s members, most notably Saudi Arabia, are struggling to keep their economy on an even keel with oil prices at these levels. The organisation had kept pumping oil at low levels to preserve market share apparently in a bid to hurt higher cost producers, but as Saudi’s budget deficit ballooned to 16 percent of Gross Domestic Product last year (the highest amongst the world’s 20 largest countries) it is clear that boosting oil revenues is becoming a necessity for the country and its policymakers.