- The ECB charges ahead
- US persistence and resilience
- Energy checkmate?
- The end of an era
- Bitcoin falls out of favour
- Key data for the coming week
MSCI World Index 1.84% QTD and 19.49% YTD
Bitcoin 4.20% MTD and 38.21% YTD
Note: As of 5:00 pm EST 8 September 2022
ECB catch-up. On Thursday, in a unanimous decision after inflation reached 9.1% in August, the ECB raised rates by 75 bps. ECB President Christine Lagarde said that the ECB expects to raise interest rates further over the next 2-5 meetings because inflation remains far too high and is likely to stay above the target for an extended period. This suggests that rate hikes could continue into early 2023. Markets are currently pricing in a 50 basis-point interest rate increase for October and a similar hike in December. ECB staff significantly revised up their inflation projections; inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. The Eurozone economy is expected to stagnate in Q4 2022 and in Q1 2023.Growth projections were revised downwards with the Eurozone economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024. The unprecedented rate hike was anticipated by the market.
The US Fed remains determined to fight inflation. Fed Chair Jerome Powell said on Thursday that the Fed needs to act forthrightly and needs to keep at it until the job is done. The number of initial unemployment claims fell last week by 6,000 to 222,000, a three-month low, demonstrating the ongoing tightness of the labour market. Markets are anticipating a 75 bps rise when the Fed meets on 20-21 September.The USD strengthened this week against the EUR, the GBP and the YEN. Energy related stocks such as Occidental Petroleum, Valero Energy Corporation and Halliburton Company were down this week as investor fears about European recession and China’s continuing Covid closures hitting demand hit oil prices.
Energy showdown. Gas prices in Europe rose again on the news that Nordstream 1 will be shut indefinitely in what appears to be retaliation for Europe pushing for a price cap on Russian energy. The EUR fell to a twenty year low. European energy ministers are due to meet on Friday to discuss the five proposals EU President Ursula von der Leyen put forward on Wednesday: a "mandatory target" for limiting power use during peak hours, a price cap on the excess revenues made by renewables and nuclear energy, windfall taxes on fossil fuel companies, and a state aid programme to inject extra liquidity into struggling utility businesses.
The end of the second Elizabethan age. The UK is now in mourning for Queen Elizabeth II following her death on Thursday at the age of 96 and after 70 years of service to the country. It comes on the heels of the formation of a new government under Prime Minister Liz Truss, the 15th Prime Minister the Queen had asked to form a government, just 2 days prior. The GBP has fallen almost 15% YTD against the USD and may fall further as questions arise over the impact of the new government’s commitment to fund a 2-year energy price cap for consumers. This may increase the UK’s already relatively high debt levels by up to £150 bn.The UK Treasury and Bank of England also launched a £40 bn fund, the Energy Markets Financing Scheme, to provide energy traders liquidity to deal with massive margin calls.The Bank of England is expected to raise rates again next week up to 75 bps as inflation hit 10.1% in July and is expected to surpass 13% by October. It has warned that Britain faced a recession with a peak-to-trough fall in output of 2.1%.
The rise of Ethereum. Bitcoin continues to fall out of favour as interest in Ethereum continues to grow. This interest is fuelled by the Merge, currently anticipated around 15 September, when the Ethereum blockchain makes its move to proof-of-stake from proof-of-work. It will, as noted by Olga Kharif at Bloomberg Crypto, slash the amount of new Ether issued to reward various key entities involved in the order transaction process by about 90%. This, along with “burning”, ie. transaction fees that no longer go to miners but are destroyed instead, should, as noted by the Ethereum Foundation, bring Ether’s net coin supply inflation to zero or even less. Ether will become a much scarcer and thereby more valuable commodity.
Key data to look out for this coming week
In Europe: On Friday is the European Union EcoFin meeting. On Monday there is German Harmonised Index of Consumer Price data, German ZEW consumer sentiment and Economic sentiment survey data and Eurozone ZEW Economic sentiment survey data. On Wednesday is Eurozone Industrial Production data and a speech by EU President Ursula von der Leyen. On Thursday is Eurozone Labour Cost data.
In the UK: On Monday is GDP, Manufacturing Production and Industrial Production data. On Tuesday look out for Average earnings, Claimant count, and ILO unemployment rate data. On Wednesday look out for CPI, PPI and RPI data. On Thursday is the Bank of England Monetary Policy Interest Rate decision.
In the US: On Friday is a speech by Christopher J. Waller, a member of the Fed’s Board of Governors. On Monday there is CPI data. On Wednesday there is PPI data. On Thursday there’s initial and continuing jobless claims, the Philadelphia Fed Manufacturing Survey, and Retail sales data.
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