Research

Marius Paun | London, UK | Senior dealer | Friday 11^th June 2021

The ECB Keeps Rate Unchanged

We start this week’s wrap with a strange bit of news. On Tuesday the 8^th, 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 21^st 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.

Marius Paun | London, UK | Senior dealer |Friday 28^th May 2021

The US Stock Markets Post A Comeback

We saw a rather quiet week in the markets dominated by the growth to value rotation narrative as well as never-ending debate of inflation/ yields making a comeback with a vengeance. S&P500 went back above 4200 and is now within touching distance of its all-time high of 4244 reached a few weeks back. The US GDP data release was of particular interest, showing a gain of 6.4% for the first quarter versus +6.5% expected. Analysts concluded that a drop in inventories and a reversal of poor trade numbers later in the year should work as a tailwind for GDP for the next few quarters.

Meanwhile, US Fed member Bullard said he expects to see inflation above 2% this year and the next. He added it will be temporary and although the time will come to talk about changing monetary policy it will not be during the pandemic. He added that instability risks are higher than normal but not at alarming levels. Furthermore, Bullard thinks investors are going into cryptocurrencies fully aware of potential volatility.

Elsewhere, China and the US trade negotiations seem to be on the right track after talks on the phone. Vice Premier Liu He and Trade Representative Tai said they had ‘candid’ and constructive dialog and agreed the bilateral trade is very important and that communications should carry on.

One of the reasons for the recent significant drop in Bitcoin price was thought to be China’s crackdown measures on Bitcoin miners. Such a major hub is believed to be the Inner Mongolia Autonomous Region, which issued some of the harshest measures: possible revocation of licenses for telecom and internet companies that engage in mining, cancellation of support for big data centres and cloud computing firms.

Over the last weekend, Belarus sent an Airforce Mig-29 fighter jet to intercept a Ryanair jetliner bound to Vilnius from Athens. It forced the aeroplane to perform an emergency landing in Minsk, where a dissident Journalist was immediately arrested. President of the European Commission Ursula von der Leyen referred to it as hijacking, attacking European democracy. At the same time, the EU applied sanctions and said it will deny access to EU airports from now on. It’s getting a bit heated!!!

On the European Central Bank front, policymaker Pablo Hernandez de Cos reiterated the rise in euro area inflation is transitory, ‘this isn’t anything new but we’ll see if there will be any other differing commentary before we get to the 10 June policy meeting next month’.

Back in the UK, Bank of England’s Governor Andrew Bailey testified in front of the UK lawmakers on inflation concerns and admitted his central bank needs to look at inflation ‘more carefully’ than normal, as that story has similarities to the US. The growth in the inflation trend indicates there is little need for more stimulus. Regarding the forex market, the rise in the pound sterling puts downward pressure on trade prices.

The US oil prices had a great week rising from a low of $63.57 to $67.26 on Friday afternoon as crude inventories came in lower than expected, down 1.7 million barrels. True to their recent excellent form, Gold prices also continued the advance, breaking above $1900 level, seen last time on January 8. It reached a high of $1912 before retracing to $1897 going into weekend. It seems the inflation concerns are giving the bulls the upper hand. After dropping below $30,000 the other week, Bitcoin rebounded somewhat, even breaking back above $40,000 at one point. However, we saw some renewed weakness on Friday, back to 36,000 with many pondering whether the recent selloff still has legs.