After weeks of volatility, the equity markets recovered last week and investors were able to return to calm. Jerome Powell is taking the situation seriously. He announced that he would increase the rate faster than expected to combat inflation by half a point instead of a quarter. This will lead to a total rise of up to 2,5 points at the end this year.
The stock market appears to be accommodating in light of the rising inflation. As a result, the apocalypse was postponed. Even the IMF is confident that the global economy can escape recession this year. The clouds may be clearing but good weather is not guaranteed. Many people would warn and say that this is the calm before the storm. (I explain later)
After two solid weeks of gains, European markets finally halted in this The weekly sequence is based upon the hope that the talks with Russia, Ukraine and Ukraine will progress. The recent rise in oil prices, the ongoing conflicts, the sanctions against Russia and the Federal Reserve’s first tightening monetary policy are all still causing traders to struggle. The Federal Reserve has tightened monetary policy for the first time, which has affected more defensive sectors. Volatility has decreased significantly in the last month.
The Biden administration has announced plans to help countries avoid Western sanctions on Russia. Jake Sullivan stated that on Wednesday, the US prepared a unified reaction to be sent to all G7 countries in order to prevent any significant economy from weakening or undermining sanctions against Russia. He stated that the US has sent this message to China, and that they expect European Union countries will follow suit shortly.
According to reports the plan would prevent Russia accessing critical items like commercial electronic, computers, aircraft parts, and other goods. Sullivan stated that the United States will not accept “systematic attempts” To reorient the financial payment system away from dollars.
Oil was first quoted in US dollars in 1973, as per an agreement between the US & Saudi Arabia. The result was the “Petro Dollar” Set the US Dollar as default currency for the world.
Chinese and Russian officials appear to be trying slowly to change the Chinese Yuan to a different percentage in oil deals. The US Dollar would then weaken. The US Dollar is currently trading at record levels due to the war, and countries/investors looking for safety.
Though, I believe this is a long-term strategy. It has not been possible to establish a firm foothold but is still worth watching.
The Fed & Interest Rates
Powell’s second speech was delivered on Monday last week. He made it clear that the Fed will likely increase its interest rates to combat inflation. This communication was likely carefully planned. Flexibility came first, followed by firmness. The investor’s side of the story worked well, driving stocks higher.
We were a bit surprised by the PMI’s activity last week. These surveys were conducted between 11 March and 11 April among large purchasing directors in the midst of the conflict. Pandemic restrictions have outweighed fears of war.
This week we see the same concerns as last week.
Federal Reserve may cause a depression by increasing interest rates. Ten of the thirteen most recent rate hike cycles have ended in recession. There have been “soft landings” Around 1996, 1985, and 1994. Jay Powell, Fed chairman, said this week that he believed the Fed could achieve a “soft landing”. Powell’s efforts are unfortunately thwarted by the past and current conditions. Take, for example, the yield curve between 2-year Treasuries versus 10-year Treasuries. This yield curve is historically a good indicator of recession and it’s very close to signaling another one within the next 12-18 month.
Jim Bullard of the St. Louis Fed Bank said this week that there are many signs that indicate higher inflation for spring. Let’s look at the facts, even though he did not give a specific timeframe. First, the Fed raised its Federal Funds Target Rate by 0.25 percent. The Federal Funds Effective Rate is now 0.333%.
Six weeks remain before the Fed’s next meeting, at which it will raise its interest rate. Tightening monetary policy will take some time to reduce inflation. There will be an increase in food and fuel prices, as well as a tightening monetary policies. Future is a hot topic. “aggressive” But the Fed does not move fast enough. Inflation is expected to rise.
Price Increases “Normalization”
US Department of Agriculture has reported that prices of fertilizer have increased 17% over the past year, and are expected to increase another 12% by 2019. Farmers in the US have a few choices. Farmers can reduce plantings and lower yields by reducing fertilizer. Third, farmers might switch from high-fertilizer crops such as wheat and corn to crops with lower requirements, which will result in lower yields. The industrial food industry is at risk of experiencing similar effects to those seen in global supply chains in the last year. This will lead to higher food prices.
Larry Fink of Blackrock believes that we are seeing the end of the globalization era due to the Russia/Ukraine conflict, and the pandemic. As the West waged a war against “economic war” The countries that have imposed sanctions on Russia and those who threaten to do so are reminded how “access to [US] capital market is a privilege and not a right.”
It will force governments and businesses to reevaluate and reassess the manufacturing footprints of their companies, leading to higher costs and nearshoring. Fink rights “[A] large scale reorientation [of supply chains] will inherently be inflationary.” Adopting digital currency, such as Central Bank Digital Currency of the Fed (CBDC), is a good idea. “global digital payments system” The Fed’s Central Bank Digital Currency, which is due to be released soon, will reduce international business costs.
Debt & More Debt
Recent national debt levels have exceeded $30T. This could prompt the Fed to take a more aggressive approach. Nonfinancial Corporate Credit reached $11.6T while Consumer Credit Outstanding was $4.3T.
According to the Fed’s latest semi-annual Monetary Policy report, corporate credit is still within its historical range. The Fed’s 2018 semi-annual report stated that corporate debt is still within the historical range. “highly elevated” risk. The COVID pandemic caused a rise in corporate debt due to disruptions and low borrowing costs. Corporate bonds may be put at risk by tighter monetary policies, as borrowing costs will rise and debt servicing rates will go up.
The Perfect Storm: Putting It All Together
As previously mentioned, there are several elements that could lead to a historic recession/depression in the markets. Nobody knows what the future will bring. We are likely to see a BEAR market in the future (and we probably already have one).
The Fed views rising inflation as an unstoppable train. Many people believe that the inflation is unstoppable at this point. Others have argued that inflation can be controlled and is only temporary.
My personal opinion is that the main problem we face is the failure to tackle the primary reason for inflation, which is government spending. Congress may make matters worse by increasing the amount of spending. Congress is considering giving money to the people to pay for increased gas prices and groceries. These well-intentioned measures are exactly what led to rising inflation.
The worst case scenario is:
- The Fed increases rates too quickly, putting the US in recession.
- Cash flow problems can be caused by a recession for companies with high debt levels.
- The devaluation of assets is caused by companies selling their assets for cash.
- Congress passes new spending bills
- The US Government and corporate debt spiral out of control.
- A massive economic collapse would result.
Bonds are still being KILLED, and the trend of STRONG BEAR is likely to continue. The Fed’s hawkish stance helped push the yield on US 10 year debt back up to 2,46 percent. The Bund in Germany rose up to 0.56% while the OAT in France was flirting with 1%.
Financial advisors and investors should take note that the US 10YR yield went over 2% which is over the average S&P 500 dividend. Bonds have been hammered, but we believe investors will move from equities to higher-paying conservative investment such as CDs.
This week we have seen a renewed interest in crypto-currencies. Bitcoin has recovered almost 10%, and is now back at $47,000. The trend appears to be very bullish! Nasdaq still has a link to crypto-currency. The Nasdaq is still tied to crypto-currency.
Jamie Dimon (CEO of JPMorgan Chase) called this week for a Marshall Plan, and for significant investments to be made in energy security both for Europe and for the US. The long-term effect of this will be higher oil prices due to the lower US oil production, and the increased focus on geopolitical issues from Russia to the Middle East.
The oil price has reversed its upward trend because of the Black Sea supply issue. Although the European Union is attempting to reduce its dependency on Russian hydrocarbons it does not intend an outright embargo. It has been a great help to reduce the buying fever in Europe at the end week as Russia supplies 30% European oil needs.
The US oil and natural gas companies’ output reached its highest levels in 60 years. Federal Reserve of Dallas conducted a survey of major industries, and found that 15 percent of large companies planned to increase their growth in the next year by 30 percent. US crude could return to pre-invasion levels this year, according to respondents. These long-term projections contrast with the short-term forecasts of top oil trader who Warning: Prices could increase to $200 per barrel.
Metal prices have also resumed their upward trend. Resurgence of Covid-19 continues to disrupt China’s supplies, and this constraint increases tensions already present in supply chains due to the Russia/Ukraine conflict. The supply shock is a factor in the rise of prices, as there are fewer products available on short notice. Copper trades for USD 10,420. Aluminium trades for USD 3670. Zinc is USD 4140. Nickel currently trades at USD 37 200. This is the limit for its daily trading of +/-15%.