Our fears of Iran being drawn into the escalating conflict between Israel and Hezbollah was met with a reprimand from the president of the Persian Gulf OPEC producer who said on his visit to New York for the UN General Assembly gathering that Iran does not want a wider war in the region and called for dialogue to resolve the conflict. It triggered a sharp but short-lived sell-off aided by a deep contraction in euro zone business activity, which weakened the euro against the dollar and further raised the anxiety level about bleak oil demand growth prospects.

This dip was deemed an unmissable buying opportunity. After all Israeli strikes on Hezbollah targets continue unabated. The deadliest attack on Lebanon in decades reportedly killed 492 people yesterday. US business activity remained steady in September. The composite PMI index broadly matched the August reading and confidently remained in expansionary territory. John, the next named tropical storm served as a reminder that the hurricane season in America is not over yet and some producers started to shut in production as a precautionary measure. Crude oil inventories in the region might experience drawdowns in the coming weeks.

After last week’s Fed rate cut focus is now on the Swedish and the Swiss central banks. Both are expected to lower borrowing costs by 0.25% confirming that inflationary pressure has been mitigated, unlike the Reserve Bank of Australia, which decided to leave benchmark rates untouched this morning because of sticky upside price pressure. Friday’s US Personal Consumption Expenditures Index can bring yet another proof that last week’s Fed decision was justified if the core reading does not exceed the estimated 2.7%. Although oil prices closed in the red despite the rebound from the day’s lows, simmering geopolitical tension and the after-effect of last week’s Fed decision will unlikely pull the rug from under oil in the immediate future. This morning’s rally is also attributed to the planned stimuli announced by the People’s Bank of China this morning in an attempt to revive the country’s economy.

Recalibrating Europe

The zeitgeist of the post-pandemic era is de-coupling, both politically and economically, animosity, often even between allies, protectionism in the name of national security and inward-looking policies. Given that there are gains to be made from globalism and global trade the current environment is anything but auspicious for regional economies. It is the US that is weathering the crisis the most impressively. The world’s biggest economy was the quickest to react to the outbreak of Covid-19. Moreover, during the Biden presidency, the Inflation Reduction Act was launched to protect the domestic economy.

As a result, its equity markets have been performing much better than other economic juggernauts of the world. Its tech-heavy Nasdaq index, admittedly assisted by the astronomical rise of artificial intelligence, has nearly tripled in value since the low of the pandemic. Even the S&P 500 index has grown 250%. Of course, the US economy, borrowing the famous phrase from Adam Smith, has provided a not so ‘invisible hand’ to the rest of the world. Yet, other economies came nowhere near matching the performance of the US. China’s inability to climb out of the 2020 self-dug hole leaves its Shanghai Composite Index a mere 4% over the March 2020 trough, and the Euro Stoxx 50 Index, albeit has fared much more convincingly than the Chinese stock market, is significantly falling behind its US peers.

The constant political intervention in the Chinese economy makes it questionable whether the country’s fortunes will be revived soon. In Europe, on the other hand, the dangers presented by heightened geopolitical tension, the possibility of trade wars are widely acknowledged. There are efforts to close the gap to the US – and fend off competition from China. The most significant attempt to date is a 400-plus-page report on Europe’s competitiveness published at the beginning of September and prepared by the former Italian Prime Minister, Mario Draghi, who is widely credited with saving the euro in 2012 as the ECB governor.
In a nutshell, it contains recommendations on financing and coordinating EU policies in order to avoid being left behind in the race for global political and economic supremacy. The report is damning and radical. It warns that if no urgent action is taken the Old Continent will not be able to compete with others as the global digital economy becomes ever more prevalent. It covers the topics of common debt, the ‘China problem’, innovation, industrial strategy and decision-making.

It advocates joint EU borrowing to meet requirements for digital and green transition and to increase defence capabilities. According to Signore Draghi, at least €750-€800 billion per year is required to keep up with the US and China and it would entail investment rising from 22% of the GDP to 27%. The view on China has markedly shifted. The world’s second-biggest economy, once seen as cooperation partner, has turned into a competitor and now into a threat. China’s state-backed competition is a conspicuous threat to Europe’s automotive industry although growing reliance on China should help achieve decarbonisation goals. Trade policy with China needs to be pragmatic and specific on a case-by-case basis.

It also highlights the innovation gap between Europe and the US/China. No EU company worth more than €100 billion was created in the last 50 years and 30% of the start-ups worth more than $1 billion left the common market in the previous 16 years because of not being able to scale up. Regarding increasing innovation and competitiveness, it calls for re-thinking Europe’s competition rules. The recommendations also point out that Europe’s decision-making rules have not matched the expansion of the bloc. As it takes 19 months on average to implement new laws, which are the subjects of numerous vetoes, it is worth considering removing these veto powers on a national level. The lion’s share of the proposals chime with Brussels attempts to re-vitalize the bloc but with the emergence of the far right all over the world, particularly in Europe, any meaningful changes are dubious leaving the EU further behind its competitors with all the long-term economic consequences of a weaker common currency and struggling equity markets.
 

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