Research

Marius Paun | London, UK | Senior dealer |Friday 21^st May 2021

The FOMC Accept That They Will Need To At Least Start To Think About Tapering?

We had the US FOMC meeting minutes released this week showing a number of participants confident that taper discussion could be appropriate at the next meetings. By and large, the inflation outlook was unchanged. Members also acknowledged that the last jobs report indicated the rate of increase in private employment has slowed compared with last year.

Furthermore, it was agreed the economy is still rather far from ‘maximum-employment and price-stability goals’. Elsewhere, the US Treasury Secretary Janet Yellen said she wants businesses to help foot the massive infrastructure bill. The stock markets continued their slump initially but mirroring last week they’re about to recoup most of the losses going into the weekend.

The US President Joe Biden has decided to delay by two weeks a reassessment of the ban on US investment in Chinese firms controlled by the military. The ban was in place since last November when Donald Trump signed an executive order. The previous deadline set for May 27^th has now moved to June 11^th.

China released its April Industrial Production figures showing a rise of 9.8% vs 10% expected and Retail Sales 17.7% vs 25% expected. The slight miss was interpreted as a sign that the domestic economy is not as strong as initially thought. The biggest political parties in Europe will vote that any consideration of the EU-China Agreement on Investment will be frozen. The move was flagged earlier this month but the draft will make it official.

The European Central Bank chief economist Phillip Lane said his bank has a lot to do to spur inflation. Mirroring his US counterparties, he does not see inflation as a persisting phenomenon in Europe. Actually, the ECB said a lot of ‘inflation rise now is the unwinding of downside shocks of last year’.

The Bank of England’s Governor Bailey put investors at ease regarding the ongoing speculation of negative interest rates. Although he admitted it’s useful to have negative rates as a possible tool, he added ‘we’re nowhere near any talk of whether to use them’. He also reiterated that inflation gains are likely due to energy and will be ‘temporary’. Interestingly the central bank does not see strong evidence of input prices passing to consumer prices!!! UK April CPI came in at 1.5% vs 1.5% expected with the largest contributions being the housing, household services and transport.

The US oil prices fell on a BBC report (quoting the Russian envoy to OPEC) that an important announcement on Iran nuclear deal is imminent. This was denied the next day but the oil prices are still down for the week trading around $63.5 on Friday afternoon.

What a week for Bitcoin@Co. It dropped below $30,000 allegedly on Elon Musk’s tweet implying Tesla was selling or has sold its Bitcoin holdings on climate change issues (too much electricity consumed). Tesla later denied this, but the damage was done. On top of that, it appears that Beijing is in the mood for tighter regulation of cryptocurrencies trading which exacerbated the downside.

Gold prices continued to rebound to $1875 at the time of writing for the third straight week on a weaker US dollar and speculation that some investors might have dropped Bitcoin to go back into precious metals.

Marius Paun | London, UK | Senior dealer |Friday 14^th May 2021

The US Inflation Sparks Concern

The US nonfarm payroll report released last Friday was dubbed an epic miss on consensus but markets reacted better than one would expect. It was interpreted as an indication that the economy is still showing signs of weakness and being quite a long way from overheating as some analysts had previously suggested. Interestingly Goldman Sachs blamed the miss on laziness explained by the ‘unusually generous unemployment benefits.

However this week, the stock markets had a bumpy ride, posting steep losses (although trying to rebound on Friday) as inflation reared its ugly head. The US April CPI numbers indicated a rise of 4.2% year on year vs 3.6% anticipated and 2.6% prior. One big driver mentioned was a surprise 10% increase month on month in used car and truck prices which were responsible for one-third of the rise!!!… the Fed vice chair Clarida dismissed concerns, saying that inflation moving above 2% was due to ‘transitory factors. He added that inflation should ‘increase further before moderating later this year’ whilst the recovery should pick up steam. Nonetheless, he acknowledged that inflation should make a comeback in 2022 and 2023.

China also posted its inflation figures for April, showing a rise of 0.9% year on year for CPI vs expected 1.0% and 6.8% advance for PPI vs 6.5% predicted. On a different note, state media in China reported a planned ban for Swedish firm Ericsson, from participating in China’s 5G infrastructure building. That comes after last year regulators in Sweden banned Huawei 5G equipment on national security concerns.

European Central Bank released the minutes from its April policy meeting pointing out that the euro exchange rate had appreciated only marginally. The central bank thinks a recovery in global trade is underway, having started in the second quarter of 2021. On top of that, the ECB reckons the risk to the euro area growth continues to be tilted to the downside but has balanced somewhat in the medium term.

In the UK, Prime Minister Boris Johnson has revealed a move to step 3 of lockdown, which means an easing of the restrictions on May 17. Among the measures: indoor hospitality to reopen; cinemas to reopen with some capacity limits; social distancing rules for public places to remain in place. Encouragingly people will now have the freedom to make their own judgement in private.

The US oil prices gained slightly to trade just above $65.00 going into the weekend after the government declared a state of emergency earlier in the week over the fuel pipeline cyber-attack. The Colonial Pipeline, which transports 2.5 million barrels per day and provides around 45% of East Coast diesel, gasoline and jet-fuel supply, was the target.

Bitcoin also suffered heavy losses as investor pessimism spilt over into the cryptocurrencies world following the surprise inflation data. Furthermore, a tweet from Elon Musk in which he said Tesla would no longer accept payment in Bitcoin, exacerbated the drop. Musk cited fossil fuel used in mining as the main reason for the U-turn and promised he would favour less energy-intensive cryptos……..like Doge?!!!