Massive Life Support
By Benjamin Picton, Senior Markets Strategist At Rabobank
Massive Live Support
“On massive life support” was Donald Trump’s characterization of the US-Iran ceasefire yesterday. This followed Sunday’s rejection of Iranian terms for peace that Trump described as “totally unacceptable”. In a boy-who-cried-wolf-style sign of growing market insensitivity to Presidential prognostications, Brent was only up 2.88% to $104.21/bbl and WTI crude remains below $100/bbl. Dated Brent rose by 0.6% yesterday to $105.62. This even as the Wall Street Journal reports that the UAE has been “secretly” carrying out attacks on Iran, including on refining infrastructure.
US equities closed broadly higher but European stocks were mixed. The FTSE100 eked out gains despite (because of?) fresh signs that Keir Starmer’s premiership is also on “massive life support” as more than 70 of his own MPs have now publicly voiced opinions that the Prime Minister should go following last week’s shellacking at the hands of the Reform party in local government elections. The French CAC40 fell by 0.69% and the German DAX was virtually unchanged. Asian stocks also had a mixed session earlier in the day with losses for Japanese and Australian indices, but gains for chip-heavy markets in China, South Korea and Taiwan.
Bond markets have been more unified in their gloom over the last 24 hours. Yields on US 10s were unchanged at 4.41%, but virtually everywhere else saw chunky rises in benchmark borrowing costs. Yields on 10-year OATs were up 3.9bps, 3.5bps for Bunds, while Gilts saw yields spike 8.6bps in a sign that bond traders might be thinking it’s a case of “better the devil you know” when it comes left-of-centre Prime Ministers in the UK.
With the prime ministerial instability gauge now well and truly pointed towards “embattled”, Starmer gave a speech yesterday that was intended to strike a tone of defiance and send the message that he wouldn’t be going anywhere. In that speech he suggested that he had not been sufficiently radical in forcing the pace of change, that the UK needed to forge closer military and economic ties with the EU, and that “if we don’t get this right, our country will go down a very dark path” - by which he presumably means it would elect Nigel Farage as his replacement.
This might sound like a curious response to the rising appeal of a Eurosceptic party channelling popular sentiment that the country has already changed too much, too fast, while the incumbent government’s revealed lack of electoral appeal suggests that many voters think the country is already headed down a very dark path under Starmer’s leadership. The implication here is that Starmer isn’t really fighting Reform, but the rise of the left-wing Green party who are siphoning off erstwhile Labour votes. Clearly, the center cannot hold and we should expect even more intense polarisation ahead, and probably more damage to the budget. Whither the Gilt market?
Speaking of budgets, Starmer isn’t the only Anglosphere Labour leader saying that things aren’t changing fast enough. Australian PM Albanese made the same comment in relation to his country’s poisonously expensive housing market this week as his Treasurer prepares to deliver the Commonwealth budget later today.
As is now the norm for budgets, most of the major initiatives have been strategically leaked well in advance and a wind-back of investor tax concessions has been telegraphed as a social cohesion measure to placate Gen Zs angry about their effect on house prices (for our detailed thoughts on this, see here). The budget is also expected to introduce new rules for discretionary trust distributions to be taxed at the company rate (to reduce their appeal as a tax-minimisation device) alongside measures to boost defence spending and cut the pace of growth in the welfare state – something that Starmer was unable to secure support for among his own MPs.
Treasurer Chalmers has said there will be a focus on resilience with “more than the usual amount of savings, and more than the usual amount of [tax] reform”. Overall, the vibe seems to be a tightening of fiscal settings – which ought to be welcomed by the RBA – coupled with tax nudges to direct a greater volume of capital toward the productive sectors of the economy rather than allowing it to congeal in the housing market. Whither Aussie bonds?
Of course, while all this is going on the Strait of Hormuz remains functionally closed and world fertilizer and energy markets are treading air like Wile-e-Coyote run off the cliff. Donald Trump will be traveling to Beijing tomorrow to meet with Xi Jinping. Finding a resolution to the war is sure to be at the top of the agenda, with Trump likely to press Xi to lean on his Iranian and Russian allies to seek peace in their respective theatres. Russia has made conciliatory noises in recent days, while Iran has indicated a willingness to hand over some highly enriched uranium to an unspecified third party (Russia?). Is there a grand bargain to be made?
In a case of curious timing, the US just imposed fresh sanctions on individuals and firms involved in facilitating Iranian oil sales to China, and Acting Secretary of the Navy Hung Cao yesterday released a new 30-year shipbuilding plan. That plan anticipates the acquisition of 11 nuclear-powered Trump class battleships, new underwater drones, and an ongoing review to the Ford class aircraft carrier design to increase lethality and reliability while reducing unit costs and production lead times. The planned expansion of the US fleet and shipbuilding industrial base is undoubtedly a reaction to China’s growing naval strength and substantial advantage in production capacity. The message to Xi is an unsubtle one.
The FT’s Gideon Rachman characterises Trump as arriving at Xi’s court in a state of supplication, having effectively lost the trade war vs China and the shooting war vs Iran. This perhaps overstates the weakness of Trump’s position by ignoring the fact that the US has tightened its grip on global energy supply chains and has shown that is has the power to put its foot on the hosepipe of Chinese energy imports whenever it likes. In the flurry of commentary over China’s bumper trade surplus in April, it seems to have been missed that import volumes for crude oil were down sharply, but values were higher. Yesterday’s April PPI figures for China also underscored the uncomfortable effects that the Iran war is having on the Chinese industrial economy.
Xi will be acutely aware of this, and he will also be aware that the US holds similar power to disrupt Chinese food imports if it was of a mind to do so. Seapower IS power, as the shipbuilding plan should remind us all. In this respect, Trump holds better cards than the FT is giving him credit for. Perhaps it is no coincidence that China bought more soybeans in April than it had done for months.