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16 May 2022
- The cryptocurrency market has undergone exciting developments in the past week. Stablecoin Terra, which was pegged to the USD, fell to 16 cents, while sister token Luna fell to zero. Terra’s value first fell to 30 cents on Wednesday, sparking panic and uncontrolled selling. Luna, a non-stablecoin cryptocurrency designed to support Terra’s value, fell on Wednesday by 96%.
- Terra’s sell-off has been caused by a financial attack designed to force its operator, a cryptocurrency group called the Luna Foundation Guard, to sell its Bitcoin reserves, in turn pushing down the price of Bitcoin and allowing traders to bet against its value to make a healthy profit.
- The collapse of one of the most well-known stablecoins, whose value was supposed to be pegged to the USD to increase its stability, shows the rather significant vulnerability of these instruments. The sell-off has also led to declines in other cryptocurrencies, including bitcoin, falling to below the USD 30,000 mark. More than $300bn has been knocked off the total value of all cryptocurrencies over the past week. Binance, the world’s biggest cryptocurrency exchange, said it was being forced to suspend withdrawals of certain currencies.
- Cryptocurrencies have seen significant declines in the past, but recent developments have shown that even purchases among dip buyers that used to help prices rebound quickly no longer have such power. Similarly, cryptocurrencies are losing their reputation as a protector against inflation, as bitcoin and co. are depreciating much more than traditional currencies.
Indices
US stocks continue to fall. Even Friday’s stronger growth, supported by Fed chief Jerome Powell’s comments that a 0.75% rate hike is really off the table this time, did not save them. However, the central bank’s ability to fight inflation without knocking the US economy into a recession still scares investors and the weekly results looked accordingly. The DJIA had its seventh week of losses, the longest losing streak since 2001, and the S&P 500 fell for the sixth week in a row (the longest since 2011), as did the Nasdaq.
European stocks, on the other hand, had a positive week after a worse start, despite ongoing concerns about inflation, tightening monetary policy, and the economic outlook. Investors were not deterred by ECB chief Christine Lagarde’s comments that the bond-buying program could end early in the third quarter and a rate hike would follow a few weeks later. The pan-European STOXX Europe 600 Index ended 0.83% higher, Germany’s DAX added 2.59%, France’s CAC 40 Index added 1.67% and the UK’s FTSE 100 Index ticked up 0.41%.
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US30 -2.26% |
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US100 -2.60% |
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US500 -2.57% |
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GER40 +2.59% |
Commodities
Most commodity prices declined amid a general sell-off in risky assets and a stronger US dollar over the past week. Energy prices are likely past their highs. Even a significant strengthening of natural gas prices at the end of the week on news of disrupted supply through a key transit point in Ukraine did not ultimately lead to a weekly rise. Energy, along with agricultural commodities, will thus continue to be affected by news related to the conflict in Ukraine.
On the other hand, industrial metals are affected by developments in China, where lockdowns over Covid-19 are hurting demand in the country. Thus, given the poor data regarding industrial production and retail sales in China, industrial metals can be expected to remain under pressure.
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Gold -3.81% |
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Silver -2.59% |
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BRENT -0.92% |
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NATGAS -5.18% |
Forex
The surprising winner among currencies this year is the Russian ruble, which on Friday fell below 63 rubles to the dollar for the first time since early February 2020. Against the euro, the ruble hit a five-year high. But behind the scenes, it’s all artificial support from capital controls Russia imposed to shield its financial sector in late February after sending tens of thousands of troops into Ukraine.
The exchange rate is thus mainly being driven by export-focused companies that have to convert their foreign currency revenues, while demand for forex is limited as imports into Russia have waned amid disruptions in logistics and sweeping Western sanctions. As a result, the actual exchange rate offered by banks differs quite a bit from the official one, with Sberbank, for example, offering dollars at 72.5 roubles and euros at 76 roubles.
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EUR/USD -1.26% |
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USD/JPY -1.02% |
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GBP/USD -0.63% |
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USD/CAD -0.06% |
Macro
The expected US inflation data on Wednesday did not please the markets, as although there was a slight decline in April from March to 8.3%, the markets had expected 8.1%. Core inflation (excluding food and energy) also pulled back less than expected to 6.2% versus 6.0%. Core producer prices rose slightly less than expected in April, but March’s monthly gain was revised to a record 1.2%.
Inflation weighed heavily on Americans’ confidence. The University of Michigan’s preliminary survey of consumer sentiment in May fell much more than expected (to 59.1 versus consensus estimates of roughly 64) and hit its lowest level in 13 years.
The UK economy unexpectedly contracted by 0.1% in March, mainly due to a contraction in the service sector. It was expected to stagnate as in February. Although the UK economy grew by 0.8% in the first quarter, it was expected to grow by 1% after growing by 1.3% in the last quarter.
What to watch out for this week
- In the US, investors will await Tuesday’s retail sales data for April. Thanks to good auto sales, despite inflation, growth of 1% is expected after March’s 0.5% growth. Along with sales, investors will also be looking for results from the largest retail chains such as Walmart, Home Depot, Target, Lowe’s and Macy’s.
- We’ll also learn about manufacturing activity, and reports on housing starts and existing home sales will show us how rate hikes are having a cooling effect on the housing market.
- Fed Chair Jerome Powell will speak on Tuesday and is expected to confirm that the US central bank will raise rates by half a percentage point at each of the next two meetings. Other Fed speakers during the week include New York Fed President John Williams, St. Louis Fed President James Bullard, Philadelphia Fed President Patrick Harker, and Chicago Fed President Charles Evans.
- In Europe on Tuesday, we will hear preliminary data on economic growth and the labour market situation. On the same day is to speak ECB President Christine Lagarde and on Thursday is ECB going to publish its latest meeting minutes.
- Wednesday’s UK inflation data is expected to point to April consumer price growth of 9.1% year-on-year, in what would be the biggest jump in annual inflation since 1980 and the fastest rate of inflation since 1982. The BoE expects inflation to rise above 10% in the fourth quarter. Labour market data due out on Tuesday should also contribute to wage and price pressures.
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