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19 December 2022
- Following up on the saga of the Bank of International Settlements (BIS) reports, Pension funds and other non-bank financial institutions have over $80 trillion of hidden debts in the FX Swaps/ forwards and currency swaps. To put it into perspective, $6.6 trillion on average every day is traded on foreign exchange markets.
- These FX Swaps/Forwards debts are majorly owned by foreign countries and with the increase in the interest rates, the whole system seems to be designed to remain USD-centric.
- According to J. Powell (FED Chairman), interest rates will keep rising until inflation is under control and brought down to 2%.
- Central banks bailing out institutions adversely affected by interest rate hikes is a necessary part of the battle with the increase in inflation. The increase in interest rates will religiously bring the supply down to a level that central banks hope the demand will meet and inevitably a slowdown in economic activity and growth will show up first.
Indices
The S&P 500 Index fell for a second week in a row and reached levels last seen in early November as a result of intensified concerns about increasing interest rates. With the exception of energy shares, which were supported by a slight recovery in oil prices, nearly every sector within the index experienced significant losses.
After central banks said that interest rates will likely need to climb further and for longer than markets had anticipated, shares in Europe dropped dramatically. The STOXX Europe 600 Index for all of Europe finished the week 3.28% lower in local currency terms. Significant stock indexes also declined. The DAX Index in Germany fell by 3.32%, the CAC 40 Index in France fell by 3.37%, and the FTSE 100 Index for the UK dropped 1.93%.
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US30 -1.66% |
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US100 -2.76% |
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US500 -2.08% |
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GER40 -3.32% |
Commodities
Prices this week were largely influenced by a plethora of inflation statistics and central bank policy choices, but to some extent, China stole the show. We now believe that the zero-COVID policy is effectively being dismantled. According to theory, removing restrictions should increase demand for commodities, particularly for fuels used in transportation. However, we believe that the subsequent rise in infections (and the associated fear of infection) will significantly hamper activity in the upcoming months.
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Gold -0.21% |
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Silver -1.13% |
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BRENT +3.86% |
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NATGAS +6.07% |
Forex
The U.S. dollar gained significantly versus the yen, sterling, and other commodity currencies on Thursday as investors were concerned about the possibility of a recession given that the Federal Reserve is expected to continue raising interest rates well into next year. In an effort to combat spiraling inflation, the European Central Bank, like the Federal Reserve, increased interest rates for the fourth consecutive meeting, albeit slightly less than at its previous two meetings. It also promised additional increases and outlined plans to pull money from the financial system. On Thursday, the Bank of England increased its interest rate by another half-point and said future increases were anticipated. Investors, though, gambled that the BoE may be nearing the end of its rate increases.
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EUR/USD +0.52% |
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USD/JPY +0.11% |
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GBP/USD -0.97% |
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USD/CAD +0.37% |
Macro
Last week’s macroeconomic data showed signs of a slowdown in inflation rates in most of the countries of G20. The U.S. went down from 7.7% to 7.1%, Eurozone reported a decrease from 10.6% to 10.1%, and the U.K. from 11.1% down to 10.7%.
On the other hand, most of the countries of the G20 reported another round of increases in interest rates. The U.S. went up from 4% to 4.5%, Eurozone from 2% to 2.5%, and the U.K. from 3% to 3.5%.
As the result, the PMI (Purchasing Managers’ Index) of most of the major markets showed market contraction except for the Eurozone where Germany was the only country leading the market expansion.
What to watch out for this week
- The upcoming week carries itself in the note of markets quieting down due to the echoing of the significant macroeconomic news as well as the arrival of the Christmas holidays. The last of all major central banks holding a meeting is the Bank of Japan which knows how to really differentiate itself from other global peers as it is expected to remain the dovish stance and stick with the negative interest rates despite rising inflation.
- The last market data released this year in the U.S. regarding consumer confidence shall give us a hint about the strength of the economy which will be also underlined with the data on housing markets and personal income and spending.
- In Eurozone, the German Ifo (Information and Forschung – a leading indicator of the overall economic health) will be announced on Monday, followed by the Producer Price Index (PPI – a leading indicator of changes in prices of goods from manufacturers) on Tuesday along with the speech given by ECB Vice President Luis de Guindos.
- After a volatile week, the U.K. area calms down to welcome the festive season. Numbers on the borrowing of the public sector will be released on Wednesday and quarterly GDP on Thursday.
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