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12 December 2022
- The Bank for International Settlements (BIS), often called the central bank of central banks, fears that central banks will again have to bail out markets adversely affected by high interest rates.
- At the same time, the BIS cites the example of the UK, where, after a £45 billion unfunded debt stimulus plan, pension funds hedging with derivatives had to sell billions of government debt to meet margin calls. The BoE thus had to resort to an emergency £65bn bond-buying programme at a time when it wanted to start selling its own bonds. In the end, however, “only” £20 billion was used for bond purchases.
- The problem with such cautionary messages is that they actually increase the risk in the markets because “the anticipation of a central bank bailout will encourage banks and other investors to take bigger risks. If their bet pays out, they cash in. If it flops, central banks come to the rescue,” writes Darrell Delamaide in his commentary on Investing.com.
Indices
US equity markets underperformed last week, losing virtually all the gains they had made in the previous two weeks. This was due to (un)surprisingly positive macro data, which again dampened hopes for an early slowdown in interest rate rises. Energy titles posted the biggest losses due to the fall in the oil price.
Stocks in Europe also lost ground, but the losses were not as pronounced as for US equities. The main reason may be fears of a recession, which may be due to aggressive monetary policy by central banks. The pan-European STOXX Europe 600 ended the week 0.94% lower, Germany’s DAX dropped 1.09%, France’s CAC 40 slid 0.96%, and the UK’s FTSE 100 Index moved 1.05% lower.
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US30 -2.77% |
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US100 -3.59% |
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US500 -3.37% |
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GER40 -1.09% |
Commodities
Oil is falling out of favour with investors and last week saw its worst weekly decline in nine months. Russian President Putin’s comments about a possible production cut due to a “stupid” price cap or Chinese leader Xi Jinping’s words about buying more oil from Saudi Arabia did not help to stave off the slump.
The threat of a recession and a poor economic outlook have brought uncertainty to the oil market, and the market has turned from one dictated by supply to one influenced by a lack of demand. The price ceiling may then act as a factor to lower energy prices and reduce the negative impact of a possible recession next year.
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Gold -0.04% |
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Silver +1.31% |
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BRENT -11.07% |
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NATGAS +0.22% |
Forex
The never-ending rise in US interest rates over the past week helped the US dollar to rise and was a relatively strong factor in the decline of most Asian currencies, including the Japanese yen. This was not helped by Friday’s optimism after speculation emerged in the market about a possible end to the Bank of Japan’s extremely loose monetary policy due to the country’s inflation rising to 40-year highs.
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EUR/USD -0.08% |
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USD/JPY +1.67% |
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GBP/USD -0.19% |
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USD/CAD +1.35% |
Macro
The good news that meant bad news for the US equity markets started to come on Monday when the services sector PMI data came out. The numbers from the EU and UK did not impress and showed stagnation and readings confirming contraction in the sector. The US numbers point to mixed data, but the data from ISM saw a surprise rise in the sector to 56.5 from 54.4 (a drop to 53.3 was expected).
Friday’s US PPI data also surprised to the upside, posting a 7.4% year-on-year decline, with markets expecting a fall to 7.2%. Then for the month of November, producer prices rose 0.3% (+0.2% was expected) and core inflation even rose 0.4% (+0.2% was also expected).
Revised data showed that GDP in the Euro Area rose by 0.3% in the third quarter after a previous estimate of 0.2%, mainly due to an increase in household spending and business investment. Also on a year-on-year basis, the data was better (+2.3%) than the first estimate (+2.1%).
What to watch out for this week
- Next week will be marked mainly by rising interest rates. In the US, a “double strike” is expected in the form of Tuesday’s inflation data and Wednesday’s FOMC meeting. Inflation can give a lot of clues about how much the Fed will eventually raise rates, but most analysts expect it to end up being 0.50%. The chances of a 0.75% rate hike have not increased much after Friday’s surprise PPI numbers.
- Tuesday’s consumer price numbers for November are expected by analysts to fall from 7.7% to 7.3% y/y, but the recent employment numbers, as well as the strong PPI numbers, are raising concerns about further inflation.
- In addition to the Fed, the ECB and the Bank of England will also decide on interest rates. The ECB is expected by the markets to raise rates by 0.50% after EuroArea’s annual inflation fell for the first time in a year and a half in November and the ECB started raising rates at the fastest pace in history.
- The Bank of England is also expected to raise rates, despite the deteriorating economic outlook. Wednesday’s information on November inflation, which rose to a 41-year high in October, may give an even better view.
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