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27 June 2022
- For the first time since the 1918 revolution, Russia defaulted on its foreign-currency sovereign debt. Although the country has the funds to pay, sanctions by Western governments have prevented payments. In effect, it is a technical bankruptcy or forced default.
- Russia came close to default at the beginning of the year but still managed to find a way around the sanctions imposed. But on Sunday night, the deadline for deferring an interest payment of about $100 million that was due on May 27 expired.
- The declaration of bankruptcy is somewhat symbolic because most countries are no longer lending money to Russia, so the situation in Ukraine and Russia itself is unlikely to change significantly.
Indices
US equities posted strong gains in the shortened week, breaking out of the bear market territory. On Friday in particular, stocks did well after good labour market numbers and, surprisingly, even after poor consumer sentiment numbers. Investors interpreted the latter as a sign that the need for rate hikes was diminishing. With the exception of the energy sector, all sectors posted substantial gains.
Stocks in Europe mostly rose, similar to the US, mainly due to the economic slowdown giving investors hope for a less aggressive ECB approach to rate hikes. The pan-European STOXX Europe 600 Index advanced 2.40%, France’s CAC 40 Index rose 3.24%, Germany’s DAX Index, was little changed and the UK’s FTSE 100 Index climbed 2.74%.
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US30 +5.39% |
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US100 +7.45% |
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US500 +6.45% |
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GER40 -0.06% |
Commodities
Demand for commodities fell last week because of fears of an economic slowdown caused by rapidly rising interest rates. Should demand continue to fall, commodity prices could fall further, but the likelihood of such a scenario is not high. Energy prices are likely to remain high due to supply constraints, inventories of many commodities, especially industrial metals, are low, and the Chinese economy should recover in the second half of the year, which will also help to limit the decline in commodity prices.
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Gold -0.72% |
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Silver -2.49% |
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BRENT 0.00% |
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NATGAS -10.43% |
Forex
Among the major pairs, USDCAD recorded the most significant weekly movement. The geopolitical situation favours that energy commodities are at their highs, which helps the Canadian dollar. The US Dollar ran out of juice after solid gains in recent weeks and saw a more significant decline after the Loonie pair failed to hold above the 1.3 level on its second attempt.
Bank for International Settlements calls for interest rates to be raised “quickly and decisively” to prevent the surge in inflation. “A lot of it will depend on precisely on how permanent these (inflationary) shocks are,” BIS general manager Agustín Carstens said, adding that the response of financial markets would also be crucial.
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EUR/USD +0.57% |
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USD/JPY +0.15% |
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GBP/USD +0.47% |
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USD/CAD -1.02% |
Macro
US existing home sales fell in May to their lowest level since June 2020, but new home sales surprisingly rose above expectations. In addition, Friday’s numbers on The University of Michigan consumer sentiment showed a drop to the lowest level in 40 years. The report also showed that consumers expect inflation to rise at an annualized rate of 5.3%, below forecasts and the peak rate of 5.4% recorded in March and April.
Also, Fed chief Jerome Powell testified before Congress on Wednesday and Thursday that inflation expectations appeared not to be rising. Although other Fed officials sounded much more hawkish and a 0.75% rate hike is still the most likely, markets took the news positively.
Preliminary PMI numbers were released in Europe and the UK and mainly came below expectations. Consumer confidence in the euro area also unexpectedly fell, as did the Ifo Institute’s Business Climate Index in Germany. Inflation in the UK continues to rise to 9.1% in May, mainly due to rapid food price increases.
What to watch out for this week
- We will see a raft of economic data in the US next week. On Monday, durable goods orders are expected to slow. On Tuesday, economists are counting on consumer confidence to deteriorate further. Pending home sales and the Case-Shiller home price index will show the impact of rising mortgage rates on the housing market. On Thursday, investors will be keeping a close eye on the personal consumption expenditures price index, which is the Fed’s leading indicator of inflation.
- Several Fed officials are also due to make appearances during the week, including New York Fed President John Williams, San Francisco President Mary Daly, Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard.
- On Thursday, consumer confidence figures will be released in the eurozone, which is expected to see another drop. We will also see Eurozone inflation on Friday. CPI in June is expected to rise to 8.3 year-over-year from a record 8.1 in May.
- Monday also marks the start of the ECB’s three-day forum in Sintra, Portugal. The conference will focus on “challenges for monetary policy in a rapidly changing world.” A panel discussion with Lagarde, Powell and Bailey will be of interest on how central banks are managing to fight inflation while aiming for a soft landing without a recession.
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