Posts tagged Europe
Goldilocks

Someone has to say it, and it might as well be me. Markets have a distinct goldilocks feel about them at the moment, or in the words of the FT’s editors; markets are beginning to eye the “immaculate disinflation”, which is a prerequisite for a soft landing. This is a story about two trends; easing inflation and economies which are, well… neither too hot nor too cold. Soft US and UK inflation reports for the month of June have been key catalysts for the change in mood. Headline CPI inflation in the US fell to a two-year low of 3.0%, with core inflation dropping by 0.5pp, to 4.8%, a 20-month low. In the UK, meanwhile, headline inflation slipped to 7.9%, from 8.7% in May, while core inflation dipped by 0.2pp, to 6.9%. These numbers don’t exactly scream goldilocks, but markets trade at the margin of the economic data; it is the direction of travel that matters.

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Danger

What’s happening in Ukraine is important. The fog of war remains thick, but the incoming news is increasingly clear. Ukraine’s counteroffensive is progressing more quickly than even the most optimistic experts had predicted. The latest reports suggest that Ukraine is on the brink on retaking Donetsk, and its airport, which would be extraordinary. There are now signs that Ukraine’s success on the battlefield is being admitted on Russian state TV. Assuming this news out of Ukraine is even partly true, we are now, in my view, in a very dangerous phase of the conflict. I am saying this precisely because Ukraine’s offensive itself is morally and politically unchallengeable. Ukraine has a right to defend itself, and to exploit its military initiative. Considerations about Russia’s potential response to what can only be described as a humiliation are absent, in both Kyiv and Western capitals. Such considerations might arise soon enough, but for now the sentiment is clear. Russia is getting a good beating and it had it coming. I wholeheartedly agree.

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Are you not entertained?

There are a lot of things we don’t know about Russia’s attempt to invade Ukraine, but there are also some things we do know. Mr. Putin’s gamble, and the West’s response, has brought into view one of the few existential tail risks that isn’t a Black Swan, which is to say, it is a known unknown: The risk of an escalation into war between Russia and NATO, and the exchange of nuclear weaponry. The continued call on NATO from Ukraine president Volodymyr Zelensky to impose a no-fly zone his country is an alarming case in point. I have no idea how to quantify such a risk, and it is fair to assume that markets don’t either, at least not with any accuracy. BCA’s suggestion that you might as well be long stocks on a 12-month basis, even if you think an ICBM is headed your way is probably a fair reflection of the level of analysis you can expect from your favourite sell-side researcher. Take everything you read with a heap of salt.

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