Research

Marius Paun | London, UK | Senior dealer | Friday 25^th June 2021

The BOE Leaves Benchmark Interest Rate Unchanged At 0.1%

The US President Joe Biden agreed yesterday to a $1.2 trillion bipartisan Senate deal to renew the country’s infrastructure of roads, bridges and highways. Seen as a crucial stimulus to help the economy compete with China, the spending would include investments in the nation’s power grid, broadband internet services as well as passenger and freight rails. Initially, Biden proposed a deal worth $2.3 trillion to fuel growth and address income inequality and trimmed the offer later on to around $1.7 trillion after an unsuccessful bid to win Republican support.

On Tuesday the Fed Chair Jerome Powell delivered his testimony in front of Congress saying the US economy has ‘shown sustained improvement since September 2020’. The real GDP is expected to post the fastest rise in decades with household spending also growing at a fast pace. The labour market has improved although the pace is uneven with job gains anticipated to pick up in the next months. He acknowledged inflation increased significantly in recent months but expects it to be transitory and to drop back towards 2%. The pandemic is still considered a risk for the outlook, especially the new strains.

We learned this week that China’s economic powerhouse region of Guangdong is at risk of power grid uncertainty. Apparently, the power usage in the area jumped over 23% from January to May this year compared with 2020, 5.5% faster than the national average. On another note, China plans to tighten regulations on iron ore trading. State planner, the National Development and Reform Commission is investigating trading on the iron ore spot market. The idea is to maintain market order and get rid of hoarding and speculation. Recently it’s been reported that base metals from the strategic reserve were released to keep prices under control.

European Central Bank’s President Lagarde said the recovery is gathering pace but authorities need to provide support ‘well into recovery’. Encouraging prospects for global demand could even speed up the pace but the new variants of Covid continue to pose a risk. She added that tightening now would be premature, posing a threat to the ongoing revival. Regarding inflation the ECB reckons the upward effect will be counterbalanced by the expected decline in energy prices??? Really?

There is renewed optimism among UK-EU officials over the Northern Ireland border dispute which has a June 30 deadline. This is when the grace period after Jan 1 Brexit deal will end. The UK is now likely to be granted an extension, according to Bloomberg.

We also had the Bank of England monetary policy meeting with the interest rate kept unchanged at 0.1%. As expected, the member’s vote was 0-0-9 with gilts purchases at £875 billion and corporate bond purchases at £20 billion. Regarding the QE, the vote was 8-1 with Haldane the only one in favour of tapering bond purchases, although worth noting that this was his last meeting.

The US oil prices edged higher reaching above $74.00 on Wednesday after a report that OPEC+ could hike output by 500,000 barrels per day in August. They’ve already added back 2 million barrels per day and the process will continue through July. The next meeting will be on July 1.

Gold prices posted a rather anaemic recovery this week to $1780 going into the weekend after dropping to $1760 last week. ‘The threat’ of a stronger US dollar is still keeping buyers on the sidelines for now despite incoming inflation.

Bitcoin dropped below the $30,000 mark yet again early in the week as authorities in the Chinese province of Sichuan ordered crypto mining projects to close over the last weekend. In the area, most miners use hydropower to mine Bitcoin. It recovered slightly to trade around $33,000 on Friday afternoon.

 

Marius Paun | London, UK | Senior dealer | Friday 18^th 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?