A person wearing a face mask walks past a displayed digital stock exchange of the New York Stock Exchange (NYSE) in Manhattan,... [+] U.S., June 29, 2022. REUTERS/Andrew Kelly
NEW YORK, United States, July 28 (Reuters Business Wire) - Global finance ministers, central bankers, and strategists gathered for their regular annual meeting on Tuesday in Brussels to weigh down the state of global markets after three months of record-breaking gains triggered by massive fiscal stimulus from governments around the world.
At stake is the outlook of economies at home and abroad as well as interest rates that are seen as key indicators of future inflation, but also what's going on with the U.S. Federal Reserve and the overall economy.
Here are some thoughts from financial strategists:
THE RISE OF THE FED
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The Fed’s response so far has been positive, with its second straight 75 basis point hike and its first since February 2020. But they have put some guardrails in place to avoid a recession, even as risks remain elevated. This includes potentially increasing rate hikes next year.
“The Fed won't give us any indications this time that they're not ready to do something more aggressive in September or October,” said Matt Tietz, chief investment officer at BlueVine Investment Management Co. "So I think we'll get another 75 bps hike."
“And if you look at our forward curve, it will go up further in the coming months,” he added.
While many investors are still expecting a more rapid pace of rate increases and believe rates will continue rising at least until 2024, many analysts are becoming increasingly concerned about the health of the economy.
That’s because while the economic data show strong growth with high unemployment and wages rising faster than other countries' average, the consumer price index has come out worse, leading some economists to say the US is now in a technical recession.
Other experts are similarly worried. “If you pull back on the equity market, you can see how your expectations go up substantially because it becomes much harder for people to take on mortgage debts, to buy stocks,” said Andrew Blythe, managing director at Goldman Sachs Asset Management.
Blythe noted that the rise in prices had been driven by energy supply shortages and could slow before year-end, adding that some data points suggest the increase will begin taming in early 2023 and perhaps by mid-2024.
“I think we ought to be careful here,” he said. “But generally, I think there are two different scenarios. Either we do have a mild downturn, which was always likely in the period around 2000, or we have a mild recession with everything held steady in terms of GDP growth.”
LONDON FORECAST
The European Central Bank’s policy committee met for two days on Wednesday, where they discussed the outlook for Europe and possibly beyond and debated whether to raise additional liquidity, reduce interest rates and tap other tools to fight low inflation in the region. They may decide on Thursday.
As ECB policymakers looked ahead to the eurozone summit scheduled for August 14-16, its chairman Christine Lagarde said she was reluctant to make any decision on new steps due to ongoing negotiations between Germany and France over a German budget agreement. EU leaders this week began talks with French President Emmanuel Macron to resolve differences. So, too, may decisions on rates.
MOST EXPENSIVE EQUITY
Investors are seeing less than stellar returns across most asset classes, including bonds, equities, and cash. Bond yields have risen sharply on the back of a big rally for inflation-resistant debt, as the yield on the 10-year Treasury soared above 2% for the first time since March 2020. That marked a 50-year high and came after soaring bond prices on the expectation of higher interest rates over the longer term, coupled with surging corporate debt issuance. While it has fallen off some recent highs, bond yields are already nearly double pre-pandemic levels and have gained roughly 18 percentage points since last December.
The dollar has weakened in late trade versus major peers this month as it continues to sink into negative territory against China's greenback. Meanwhile, gold has regained ground against the yuan following its sharp depreciation over the holidays. Bitcoin meanwhile remains one of the best-performing assets over the long term in large part due to its highly volatile nature, having jumped from $40,000 at the beginning of 2021 to almost $68,000 today.
FANTASTIC RISING ESCAPE
A surge in the prices of commodities such as crude oil, copper, and gas is squeezing household budgets. Rising inflation is causing Americans to tighten their belts and cut spending. Food prices have also shot up by the day. Oil production in North America has collapsed at a quicker pace than expected last week amid concerns that Russia could choke off exports of liquefied natural gas used as fuel. [Graphic: Crude oil inventory crunch in Asia ]
Meanwhile, rising commodity prices combined with lower interest rates have raised the value of money on deposits. Investors have started taking advantage and are seeking safe havens, including those provided by foreign currency deposits, where the value of currencies can depreciate in value over time, such as sterling and the British pound.
“Rising commodity prices are putting pressure on currency valuations and holding them in USD is probably the safest way to store funds,” said Chris Bailey, head of fixed-income trading at CFRA Strategic Research.
STRONG ENERGY SUGGESTS
The war in Ukraine is driving up prices as Western companies scramble to find alternatives to fossil fuels. There are also geopolitical considerations, such as fears for NATO nations that Russia might use Ukraine as a base to conduct operations in Eastern Europe.
“The biggest worry around all of these things is that geopolitics is likely to drive the focus on oil and gas, particularly given Putin’s stated intention of using his nation as the vanguard to push its influence in the region. And that will lead to increased competition for those supplies,” according to Morgan Stanley strategist Tim Ashcroft.
The group believes gas sales in the Gulf will fall 6.9% in the fourth quarter from the previous year, compared to a 16.1% decline in the third quarter, mainly driven by weaker demand and tighter margins. LNG and shipping stocks dropped by 15.7% during the pandemic.
“There has been a huge shift away from renewable power generation. It's all being sourced through gas and cargoes are getting canceled,” said Richard Hunter, senior analyst at Rystad Energy.
Despite falling costs and reduced reliance on imported coal and oil, households are still spending heavily as spending on goods rose 1.4%. Spending on electricity accounted for 26.3% of total spending. According to Credit Suisse Asset Management, the U.S. Dollar Index declined 0.3 points to 110.8. [Graphic: Household Debt]
MORE ON WEARABLE AND SHORTENING STIERS
Investors who like to hold onto investments like shares and government bonds often like the idea of wearing them down. For example, the Dow Jones Industrial Average fell 0.4% to 32,543.36 and the Nasdaq Composite edged 0.1% lower to 12,061.91.
While short selling on futures contracts is theoretically allowed without disclosure requirements, many states have adopted rules requiring brokers to disclose trades to customers, thus making them subject to potential legal action. However, some exchanges such as Robinhood have made a name for themselves as platforms where users can bet on the direction of the stock market. The firm claims to earn between 36 cents and 60 cents per contract. On average, they earned over €1 billion in profit, according to Insider Intelligence Inc.
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Reporting by Maggie Fitzgerald; Editing by Mark Potter
Our Standards: The Thomson Reuters Trust Principles.
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