Global financial markets remain volatile with US stock markets 15-20% down for the year but off their lows – the US Dollar (as measured by the DXY index) is the strongest it has been for 15 years with US interest rates rising quicker than elsewhere including rising bond yields. The US 10-year bond is trading at a yield of 2.90% Yield-to-Maturity but not as high as the recent high yield of 3.20% YTM.
Oil remains very well supported at $120 per barrel and gold is struggling to maintain its historic hedge against inflation status hovering at a modest $1,850 per ounce.
What are the Market Questions Right Now?
1) Has US Inflation Already Peaked?
Economists expect US inflation to have moderated in May, in a sign that inflation may have peaked, as weakening consumer demand and loosening supply chains mitigate price growth. In April, the US CPI (Consumer Price Index) moderated for the first time in eight months to an annual pace of 8.3 per cent, 0.2% lower than the previous month. Despite the modest decline, inflation came in above economist’s expectations and remained at a 40-year high.
Still, a second consecutive moderation in the annual rate (published Friday June 10th) should offer hope that we have indeed passed peak inflation. The implications for US interest rates and financial markets generally are significant.
2) Will the ECB stick to plans to raise interest rates in July?
With inflation setting new eurozone records every month this year, it will be hard for the European Central Bank to explain why it is not immediately raising interest rates when policymakers meet in Amsterdam on 9th June. Yet this is exactly what ECB president Christine Lagarde is likely to do when she is expected to say that the central bank is sticking to its pre-announced plan to first stop buying more bonds under its Quantitative Easing programme (the latter increases the money supply) before starting to raise its deposit interest rate (the overnight rate at which it pays interest to banks who deposit money with the ECB) from minus 0.5%.
This means the earliest the ECB could raise rates for the first time since 2011 is at its meeting on July 21, after it stops adding to its EUR 4.9 trillion portfolio. The main question left to be resolved is how big the July rate rise will be?
3) Did China’s Economy Stabilise in May?
China’s economy was buffeted by strict and widespread coronavirus lockdowns in April, with several economic indicators falling to two-year lows. While the severity of the restrictions stabilised in May – and even showed signs of tentative easing towards the end of the month – the limited respite was likely not enough to avert a further slew of weak economic data.
Shanghai’s phased-in reopening may only represent a small respite rather than a turning point. The real turning point will be marked by a shift in China’s stance on ‘Zero-Covid’ rather than headline Covid caseloads, the easing of some lockdowns or monthly economic activity data. For financial markets, a lot depends on whether China moves to such a policy.
Spare A Thought for Those Investment Bankers!!
The launch value of initial public offerings in the US and Europe has fallen 90 per cent this year as the Ukraine war and rising inflation and interest rates has forced businesses to shelve plans to go public.
Just 157 companies have raised a total of $17.9 Billion in the first five months of 2022, compared with 628 that raised $192 Billion in the same period last year. The first three quarters of 2021 were the busiest ever for listings, as companies rushed to go public after putting plans on hold during the coronavirus pandemic. But the latest figures suggest that the issuance slump in the first quarter of this year, which was triggered by Russia’s initial invasion of Ukraine, has not eased.