16th September 2019

Written by Scott Reid (Associate Partner)

From the Tory civil war to actual war. Scott Reid looks at the eruption of tensions between Washington, Tehran and Riyadh as drone strikes hit two of Saudi Arabia's most important oil sites.

Good morning,

If the Tory civil war and sensational pronouncements from our onetime prime minister-turned-garden shed provocateur weren’t enough to keep your Sunday papers saucy, how about the prospect of actual war?

My tone may seem flippant but the reality of the situation between Iran and the US this morning is much more serious following two drone strikes on Saudi Arabia’s largest oil refineries over the weekend. The price of oil is skyrocketing, Tehran has announced its readiness for “fully fledged war” and president Trump has tweeted that the US is “locked and loaded”.

The problem being that nobody quite knows who’s responsible. The attacks on the Abqaiq processing facility and the Khurais oilfield, which together make up over half of Saudi Arabia’s oil supply, have been claimed by Yemen’s Iranian-aligned Houthi rebels, but US secretary of state Mike Pompeo has pointed blame solely at Tehran. The Iranian foreign minister has since claimed that Washington is seeking a policy of “maximum falsification” as pretext for retaliatory strikes.

And yet, just this time last week, things looked comparatively peachy. Having given the boot to US national security adviser John Bolton – whose comments on potential US warmongering could have given Genghis Khan a run for his money – chances a non-violent resolution seemed to have lifted. According to Bloomberg, a final row between Bolton and Trump had arisen over the president’s enthusiasm to meet with Iranian president Hassan Rouhani, possibly at this week’s UN general assembly in New York.

Fast forward a couple days and the forecast for business doesn’t look great. Analysts are expecting the cut of an estimated 5.7 million lost barrels of Saudi oil per day (which for a bit of context, is around five to six per cent of total global supply) to hit the consumer hard. The price of Brent Crude has already jumped as much as 20% at the open of global markets (though is currently sitting 10% higher at $66.28 a barrel) and West Texas Intermediate is around nine per cent higher at $59.75 a barrel.  

In the meantime, expect political hostilities to worsen. The culprits – whoever they are – appear to have called the bluff of this most sabre rattling of US administrations. This isn’t the first time the Houthis have used drones against enemy interests, but this latest attack is a reminder that they are developing this strategy and could land serious damage on US interests in the region.

The most interesting next step in all of this might now be taken by president Trump. Shorn of a warmonger, could we see him stick to what the media reported last week as his instincts for agreement? His latest tweet of “PLENTY OF OIL!”, and his accompanying release of US oil reserves, suggests he might be more optimistic than the rest of us.

News

Police in Hong Kong have fired blue dye and tear gas at protestors in Hong Kong, as unrest continued for the 15th consecutive weekend yesterday. Riot police responded to a gathering in Causeway Bay shopping district, where demonstrators were attacking government buildings with rocks and petrol bombs. British flags were raised by the crowd with accompanying demands for the UK to facilitate resolution talks. (£) Boris Johnson has said the UK will reject any offer by the EU to delay Brexit beyond October 31. Writing in The Telegraph ahead of a meeting later today with European Commission president Jean Claude Juncker, the prime minister said he believed agreement could be struck on October 17/18 at the next EU Council summit. Today’s meeting is expected to cover fresh proposals for the Northern Irish backstop with the possibility that a transition period could last until 2022. Liberal Democrats have voted in favour of a policy shift which would see the party revoke Article 50 without the need for a referendum if they won the next election. Gathering for their annual conference in Bournemouth this weekend, party members voted by a significant majority in favour of the new policy, which would only come into force if the Lib Dems won a general election as a majority government. Before an election takes place, however, leader Jo Swinson also confirmed the party would continue to campaign for a ‘People’s Vote’ referendum.

Business & Economy

Sir Vince Cable has intervened in the row over Hong Kong Exchanges and Clearing’s (HKEX) £32 billion offer to acquire the London Stock Exchange (LSE) Group, labelling opposition to the bid as a movement to “bash the Chinese”. Sir Vince suggested safeguards could be built into a deal which would limit Chinese corporate involvement in British telecoms and nuclear power. Meanwhile, the Financial Times reports that HKEX will now begin a three-week “charm offensive” in order to soften shareholder appetite to the proposal, raising the prospect of a possible hostile bid. (£)

The Financial Times also reports that Thomas Cook is in “last-minute negotiations” with some of its shareholders to secure a £900 million rescue deal. The move would leave Chinese firm Fosun Tourism in majority control of the airline, subject to the approval of three-quarters of Thomas Cook’s bondholders.

New research released by the Resolution Foundation found has suggested illegal work practices in the UK remain “far too common”. The think tank found that around one in 20 workers do not get receive holiday pay, while one in 10 do not receive a payslip. Workers in SMEs, and in the hotels and restaurants sector were most likely to miss out of legal workplace entitlements.

Markets

The Week Ahead

Hot on the heels of the European Central Bank’s decision to cut interest rates on the euro and restart its €2.6 trillion quantitative easing programme last week, central banks will once again be in the spotlight. This week we will hear from the Banks of England and Japan, alongside the US federal reserve and announcements in Brazil, Ghana, Indonesia, Norway and South Africa. Despite the ECB rate cuts, analysts are widely expecting monetary policymakers elsewhere - and on Threadneedle St and at the Fed in particular - to maintain their hawkish outlooks.

Israel’s general election will be held on Tuesday, with the results of the Tunisian presidential elections due the same day. In Brexit news, Boris Johnson will travel to Luxembourg later today where he will to discuss fresh proposals for changes to the Withdrawal Agreement with Jean Claude Juncker.

In corporate news, Apple goes to court this week where it will seek to appeal an EU penalty to pay €13 billion back in taxes to Ireland. Elsewhere, earnings reports will be few and far between, but headline announcements are due from FedEx in the US, and Kingfisher and Next in the UK.

Whats happening today?

Finals

City Lon Inv MJGleeson Petra Diamonds

AGMs

BCA Warehouse Reit

Interims

Horizon Discovery         Learning Technologies Group M.p. Evans Ocean Out Science Sport Spire Healthcare

Columns of Note

In The Times, Paul Johnson suggests that low interest rates are preventing savers from making serious headway with their pensions. Pointing to data released last week which showed pension annuity rates at a 25-year low, Johnson predicts more workers will now be looking to their seventies as a viable time to retire.

Over the weekend, a Financial Times Big Read looked at the politics and history surrounding the reconstruction of Berlin’s Stadtschloss – a brick-for-brick replica of a Prussian royal palace in the heart of the German capital. Author Frederick Studemann concludes the project exhibits Germany’s healthy outlook on its history, willing to engage in a dialogue even at the expense of creating public controversy.

Did you know?

In 1683, a group of people in the Netherlands were ice skating when the ice broke off and they floated to Essex.

Parliamentary highlights

Today

House of Commons

No business due to prorogation. Will next sit on Monday 14 October.

House of Lords

No business due to prorogation. Will next sit on Monday 14 October.

Scottish Parliament

No business scheduled.

TOMORROW

Scottish Parliament Topical Questions (if selected)

Scottish Government Debate Investing in our Credit Unions

The Impact of the UK Government’s Family Migration Policy on Scotland

Members’ Business Macmillan Cancer Support’s World’s Biggest Coffee Morning