Markets and Geopolitics - 2nd week of October

Hi all,

The world is getting fractionalized with more regional conflicts(wars!) firing around the globe. We all enjoyed global piece for a while, now get back to the Roman times. Happy to introduce the first ever edition of the SovereignBeat newsletter covering the latest global finance and geopolitcs movements this week. Let’s cut straight to the chase:

Global Finance

European Union

• The EU's debt is expected to hit €900bn by the end of 2026 as it borrows for COVID-19 recovery and Ukraine support. Despite the surge from €50bn in 2020 to €450bn in issue, investors find EU bonds less attractive than those of individual European countries. The debt is set to surpass €500bn next year, funding recovery programs, green investments, and Ukraine aid.

• Investors are seeking a premium for holding EU debt, despite its AAA credit rating surpassing majority of countries from EU including France's AA rating. While the EU's benchmark 10-year bonds trade with a yield of 3.6%, Germany's yield is 2.8%, and France's is 3.4%. (Yields move inversely to prices).

• Seems like investors are much more excited about fixed- income markets of the individual economies rather than the union as a whole. One of the main complaints from investors is relatively small amount of EU bonds freely available to trade, making them less liquid, or more expensive to buy and sell.

Argentina

• Argentina's central bank has raised its primary interest rate for the sixth time this year in an effort to control escalating inflation, which has now surpassed 100%. The key rate saw a 15 percentage point hike, reaching 133%. This move comes in response to recent data revealing a year-on-year inflation rate of 138.3% in September, the highest since the hyperinflation period of the early 1990s.

Ukraine

• The IMF has revised its World Economic Outlook for Ukraine, forecasting GDP growth at 2% (2023), 3.2% (2024), and 4.0% (2028). Inflation is expected to decrease to 15.5% in 2023 and 10% in 2024, down from 26.6% in the previous year, with a notable drop to 7.1% by the end of September.

• During annual IMF meetings in Marrakesh, a managing director of the Fund Kristalina Georgieva praised Ukranian financial and monetary policies that helped to fight inflation and remove the fixed exchange rate agaisnt the dollar. The key message though is that Ukraine should demonstrate continious progress with reforms and have a paln on how to attract investment rather than just solely relying on grant financing.

• Meanhwile Biden is ready to extend his his helping hand to Ukraine anyway with a $100B aid package, its largest, and will work to convince the IMF and the World Bank to maintain financial support for Ukraine. If approved, it will be the largest package of military and humanitarian aid to Ukraine, which should be enough for about two years.

russia

• The rouble climbed by 4 per cent against the dollar trading at Rbs 95.94 on Thursday after the Kremlin reintroduced capital controls for the first time since the aftermath of russia’s invasion of Ukraine last year.Vladimir Putin signed a decree compelling 43 companies, spanning energy, metals, and agriculture, to sell a portion of their foreign currency revenue domestically to support the declining rouble.

• Despite a Thursday rebound, the currency is down 23% against the dollar this year, plummeting by about a quarter since the war began due to Western sanctions impacting the country's economy.

Geopolitcs

Israel

• For those not in the loop, Israel has been attacking Gaza in response to a devastating terroristic assault by Hamas militants on October 7th. The Israeli military recently reported over 1,400 casualties and disclosed that an additional 199 people had been taken hostage. According to Palestinian health officials, 2,750 lives were lost due to Israel's bombardment, surpassing the casualties from the 50-day Israel-Gaza war in 2014.

  Israel has severed the supply of water, electricity, fuel, and goods to Gaza, which Israel and Egypt have subjected to a crippling blockade since Hamas took control in 2007.

• On Mondayc 17th of October, Lebanon's militant Hezbollah group announced the initiation of the destruction of surveillance cameras on various Israeli army posts along the border. Growing concerns suggest that the Iran-backed Hezbollah may become involved in the conflict with Israel. With Iran continuing its support for Hamas and recent statements from Hezbollah and Iran's Foreign Minister, apprehensions are mounting about the conflict expansion, potentially reaching Israel's northern border with Lebanon.

• Meanwhile, Israel is under pressure from Washington and regional powers to facilitate the entry of aid into Gaza. Simultaneously, there are efforts to convince Egypt to open the Rafah crossing, connecting its territory to the southern part of the enclave, especially for third-country passport holders.

  Diplomats are facing challenges in finding common ground between the parties involved. Egypt has stated its willingness to allow humanitarian aid into Gaza but insists on permitting entry only for individuals with dual citizenship into its territory. On the other hand, some foreign officials claim that Israel is open to allowing people to leave Gaza for Egypt but is resisting the entry of humanitarian aid.

• On Friday 13th, About 1.1m of Gaza Strip's population received a warning from Israel to move from the north to the south within a 24-hour deadline.About 500 000 out of 1.1m have left northern Gaza for the south following Israel's evacuation notice.

Armenia and russia

• Armenian leader Nikol Pashinyan skipped a summit attended by russian president Vladimir Putin in Bishkek on Thursday, reflecting a growing rift between Yerevan and Moscow. Putin's visit marks his first trip outside Russia since the International Criminal Court (ICC) issued an arrest warrant for him in March.

• As a reminder, The love story between two presidents broke-up after Azerbaijan took by force Nagorno-Karabakh region last month and russia did not manage to protect its closest partner through promised security guarantees. Since Armenia won a war against Azerbaijan in 1994, capturing Nagorno-Karabakh and some surrounding Azerbaijani regions, the Kremlin has been the guarantor that this frozen conflict would not become another big war. As you damn well know, you can toss aside any agreements signed with russia - their memory is that short.

Chart of the Week

• Most of the net oil-importing countries in the MENA region(Middle East and North Africa) have seen an increase in their G-spreads, largely attributed to the surge in energy prices.

  The "G-spread" or "government spread" is a measure that helps us understand the extra interest rate (or yield) investors demand for holding a government's bond compared to a safer benchmark, typically a the U.S treasury note of the same maturity that is considered risk-free. The G-spread tells you how much extra interest you'd get from riskier countries compared to a safe one. If the G-spread is high, it means investors want more compensation for the higher risk.

• Israel’s G-spreads surged by over 40% within less than a week following the onset of the regional conflict, with subsequent spillover effects observed in neighbouring Jordan.

• The Fed’s decision to hold interest rates at their current level on 20-Sep in addition to hawkish comments (expectations of an additional rate hike by year end, with tighter-than-expected monetary policy through 2024) has also increased pressure on the bond market.