Marius Paun | London, UK | Senior dealer |Friday 18th June 2021
The FOMC Keeps Rate Unchanged But Starts ‘Thinking About Thinking About Tapering’
The FOMC decided to leave interest rates unchanged but fresh projections now indicate two possible interest rates hikes in 2023. At the same time the pace of QE will remain at $120 billion per month as expected. Interestingly seven FOMC members foresaw no rates increase in 2023 but 13 did. Fed Chair Jerome Powell acknowledged a spike in inflation but maintained his stance that inflation will be temporary. He added it’s premature to begin discussing higher rates.
If last time they said they were not ready to start ‘talking about talking on bond purchases tapering’, that position has now changed. Many speculated that we could see the Fed starting to taper by Q4 of this year or at least make the announcement by that time they will start to do it early next year. In reaction the stock markets tanked and the US dollar strengthened putting downside pressure on gold as well as the whole commodities spectrum.
The G7 meeting came to an end with world leaders agreeing to continue economic stimulus until the recovery is firmly established. They also singled out China for human rights in Xinjiang province. At the same time, G7 demanded Russia take action to stop cyber attackers from demanding ransoms. Responding to accusations, China said it does not pose systematic challenges to other nations.
European Central Bank President Lagarde said that it was too early to talk about ending PEPP purchases and that she hopes to present the bank’s strategy review by the end of the summer. The central bank anticipates a return to pre-pandemic levels in the first quarter of next year. In summary, the ECB is confident it delivered what was asked in terms of policy support.
Back in the UK, the Government approved a 4-week delay to the end of lockdown. Although the vaccination program is rather advanced, the Delta variant still poses a few questions. The final lifting of all restrictions was scheduled for June 21 but now July 19 is the deadline. Prime Minister Boris Johnson promised it will be the ‘final delay’.
On another note, the UK agreed to a trade deal with Australia, dubbed a step forward for both nations – UK for obvious reasons and Australia to diversify its exports from China market. For Britain, it will be cars, whisky, confectionery benefiting from the tariff-free agreement. Australian wine will also be imported into the UK with no tariffs. British farmers (one sticky point) will be protected by a cap on imports for 15 years. Food Authorities down under were not unduly concerned as they said the bulk of their production is absorbed fully by the Asia Pacific region and there is hardly anything left to export into Europe.
The US oil prices started the week on a positive note but posted a sharp sell-off after the FOMC meeting, due to a stronger US dollar. However, it seems the buyers were back in charge on Friday afternoon with the price around $71.50 after a short trip below $70.00 during the previous sessions.
Gold prices were also hurt by the Fed comments and saw a nosedive to $1767 on Thursday. It’s a rather strange one as almost everyone expects inflation in the short term. The debate is whether inflation is transitory or not. Meanwhile, the rates are expected to be on hold for the next two years or so. That would be a dream scenario for gold….. perhaps the spike in the greenback kept bulls frustrated. For how long is another story.
Bitcoin rose back above the $40,000 mark but like anything else pulled back after Wednesday evening, now at 36,500. The chart shows a possible death cross scenario where the 50-day MA is close to crossing below the 200-day MA signalling a potential bear market. Elon Musk had another change of heart, now tweeting favourably again, but will that help?
Marius Paun | London, UK | Senior dealer |Friday 11th June 2021
The ECB Keeps Rate Unchanged
We start this week’s wrap with a strange bit of news. On Tuesday the 8th, multiple major websites were down; Reddit, Twitter, Amazon, CNN, PayPal, the UK Gov website gov.uk, among the best-known ones. The outage was traced to an error in a content delivery network run by Fastly. It made the affected websites inaccessible for more than an hour.
Meanwhile, the major US indices stayed close to their all-time highs with S&P 500 actually reaching a fresh record of 4249.8 yesterday. At the same time, the US 10-year yields fell to a one month low under 1.50%.
The US President Joe Biden spoke with senators on both sides of the political spectrum and urged them to carry on negotiations on an infrastructure deal. But Senator Capito said talks between Biden and Republicans have in fact stopped and that no agreement has been reached.
We had the inflation data from China coming out and showing CPI rising 1.3% y/y vs 1.6% expected with food prices seen as falling especially pork. On the other hand, PPI was 9.0% higher, the fastest rise since 2008 vs 8.5% consensus, impacted by rising commodity prices. So, for the moment PPI did not flow through CPI this month. In reaction, China’s state planner promised to intervene to keep inflation in check for certain goods.
The European Central Bank left its benchmark interest rate unchanged in their June monetary policy meeting, as widely anticipated. It added that PEPP will continue through at least the end of March next year, it reaffirmed the size of PEPP at 1.85 trillion euro, purchases to continue at 20 billion per month. The ECB also added the rates to remain at current levels or lower until inflation gets close to but below 2% target.
Bank of England’s Governor Andrew Bailey said they have not made a decision on a central bank digital currency as his team is still exploring the ‘opportunities and risks of CBDC’. He also remarked that the overall impact of digital money on lending rates and credit provision is modest. Elsewhere the UK Times reported that Prime Minister Boris Johnson is considering a 4-week delay to the reopening, initially scheduled on 21st of June.
The US oil prices moved above $70 per barrel earlier in the week as the US sent a statement to Iran to ‘Refrain from taking further steps that violate the nuclear deal’. The price continued its rally this morning reaching a high of $70.88 before retracing slightly to $70.5 going into the weekend.
Gold prices posted a selloff for the second week in a row. It appears that the $1910-$1920 handle which acted as resistance since 2009 is proving a struggle to overcome. So far, any attempt to push above it was unsuccessful, triggering a selloff.
Bitcoin made headlines again this week with one of those bombastic announcements. El Salvador President said he may make the cryptocurrency a legal tender, the first country to do so. President Nayid Bukele made the announcement last weekend, speaking at a conference in Miami, Florida. Bitcoin seems to have entered a consolidation phase around $35,000 mark after the sharp dive seen a few weeks back.