Tag Archives: Silver

Weekly Comic: The Incredible Shrinking Euro

Posted on July 19, 2022 by Investing.com

Investing.com — The alarm bells will be ringing in Frankfurt this week as the European Central Bank’s governing council meets with the euro back where it was 20 years ago – worth only a dollar.The last time it was this weak, one could make an argument that it was still largely an unknown quantity, struggling to fill the shoes of the mighty Deutsche Mark in global foreign exchange markets. This time, it’s because its weaknesses are only too familiar.The ECB will raise its interest rates for the first time in a decade on Thursday, having sat out the whole of the last eight years with its key rate below zero, paying banks to lend from it in a fundamental perversion of capitalism. Even after Thursday, real – that is, inflation-adjusted – interest rates will still be running at nearly -10%. A well-timed leak on Tuesday, suggesting that the bank will discuss a hike of 50 basis points rather than just the 25 guided for, appears to have averted the embarrassment of having the euro trade below a dollar: the single currency shot as high as $1.0269 in response on a burst of what analysts said was largely short-covering.And there was further good news for the euro later in the day, when Reuters cited unnamed sources as saying that Russia will probably restart flows of gas through the Nord Stream pipeline when a scheduled maintenance period ends this week. If confirmed, that would banish fears of an immediate and complete stop of deliveries to Europe’s largest economy, which has been one of the biggest drags on the euro in recent weeks.However, for the euro to hold or even extend those gains, a number of things need to happen, almost all of them outside the control of the ECB.First, there needs to be an improvement in inflation trends in the U.S. that allows the Federal Reserve to stop raising U.S. interest rates so aggressively. This is the key point in the brutally simple tale of the euro’s decline against the dollar this year: the U.S. economy is growing fast enough to withstand higher interest rates, and the Eurozone’s isn’t. While Fed officials talk of raising rates to 3.5% or more, market interest rates suggest the ECB won’t be able to go beyond 1.5%.Second, the energy crisis currently engulfing Europe needs to abate. While Russian gas supplies remain the key pressure point here, the crisis actually goes much deeper. An acute lack of snowfall on the Alps over the winter means that rivers on all sides cannot generate the required hydropower, let alone cool France’s ageing and increasingly unreliable nuclear reactors. French electricity prices for the day-ahead hit a staggering 589 euros ($603.73) a megawatt-hour on Tuesday, a level unsustainable for any energy-intensive economy.Energy and food accounted for around half of the 8.6% annual inflation reported by Eurostat in June. While government tax cuts in Spain, Italy and elsewhere may ease that in the course of the year, they will only do so by widening budget deficits.Which brings us to point three of what’s needed to turn the euro around: The government crisis in Italy needs to be resolved.This is not impossible: Italian government crises tend to happen every 12-18 months as a rule, and they all get resolved somehow. However, this one has more riding on it than most.Financial markets want to see Mario Draghi, the ECB’s former president and a guarantor of orthodox economic policy, remain as Prime Minister. Draghi – aware that he doesn’t have a popular mandate of his own – has said he can’t continue to govern unless the populist 5 Stars Movement (M5S), which refused to give him its vote of confidence last week, returns to the coalition.M5S defected in protest at a lack of support for lower-income groups in dealing with high inflation. Draghi has so far refused to accommodate any demands for more subsidies because he needs to present a budget that will persuade the EU to approve 200 billion euros of post-pandemic recovery funds.There is no chance of that issue being resolved in time for Thursday’s ECB meeting, which will again stop President Christine Lagarde from giving too much away about the bank’s new ‘anti-fragmentation’ tool, supposed to keep bond yields from rising too much as the ECB finally begins to raise its interest rates. That’s because the tool will reportedly be conditional – depending specifically on the observance of Eurozone rules on spending and borrowing.The reality is that no one is going to win the next Italian election on promises like that, whether they take place this year or next.As such, even though the euro’s positioning looks stretched at parity, it can easily overshoot in the near term if any of the many risks around it materialize. JPMorgan (NYSE:JPM) analysts revised their target for the currency to 95c at the weekend. But for the time being, the Eurozone’s drama looks more likely to play out – yet again – in the bond markets rather than the currency ones. Continue reading →

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Commodities: Inflation, Interest Rates And The U.S. Dollar

Posted on July 19, 2022 by SP Dow Jones Indices

oatawaBy Jim Wiederhold After last week’s highest inflation print in over four decades, the U.S. dollar (USD) rose to its strongest level in 20 years, as measured against a broad basket of currencies. The euro also hit parity with the USD for the first time since 2002 as a consequence of Europe’s front-line exposure to the Russia-Ukraine conflict and the perception that the European Central Bank has been slow to raise interest rates. Most major commodities included in the headline commodity benchmark, the S&P GSCI, are still showing positive gains YTD, even with the global recession fears permeating market sentiment. Some traditional inflation hedging assets are not performing as expected, with negative YTD performance for real estate, gold, and U.S. Treasury Inflation Protected Securities (TIPS) (see Exhibit 1), but commodities have recently been offering inflation protection amicably. Commodities’ outperformance can be explained by the energy sector commodities. The worst-performing energy constituent within the S&P GSCI, S&P GSCI Crude Oil, was up 41.36% YTD. While gasoline prices have been getting the headlines in the U.S., gasoil, heating oil and natural gas were all up nearly 100% in 2022. A cooling off of these energy commodities could be a leading indication for cooling of inflation in the near term. USD strength has traditionally been a headwind for commodities. Most major commodities around the world are priced in USD, so when the currency strengthens, buying commodities becomes more expensive in non-USD currencies. As one strengthens, the other weakens. But this has not been the case recently, and there are previous periods in history where this relationship has faltered (see Exhibit 2). In this case, commodities moved first, and the USD strength has been more recent in response to an abrupt switch in global monetary policy aimed at cooling inflation. Something will have to give soon if this unusual situation based on history continues in the short run. If inflation finally starts to ease, it’s possible the U.S. Federal Reserve might ease up on its rate hiking regime, thereby cooling off the red-hot USD. Where does this leave us in the current environment compared to similar situations historically? During two similar periods where skyrocketing inflation was met with interest rate tightening (in the 1980s and 2000s), commodities still tended to outperform, although eventually the high cost of goods caused the U.S. consumer to suffer and recessions to ensue. Commodities have posted double-digit percentage gains during high inflationary regimes, as can be seen in Exhibit 3. Allocating aggressively to commodities and away from equities during these times has tended to produce favorable risk-adjusted returns, as can be seen by our S&P Multi-Asset Dynamic Inflation Strategy Index, with a 6.4% gain YTD. For more information on this index, please read our prior blog. Commodities have been known as an inflation hedging asset mostly because they are raw materials that go into the production of the goods that tend to rise in lockstep with inflation. Much of the recent strength in commodities prices can be attributed to supply shocks, including the Russia-Ukraine conflict and post-COVID-19 supply chain disruptions. Longer term, there are additional supply constraints imposed by the energy transition. Interest rates are a blunt monetary instrument and can do little to directly address these supply constraints, but they can slow demand. Similarly, USD strength may eventually hamper commodity demand from non-U.S. consumers. Disclosure: Copyright © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI please visit www.spdji.com. For full terms of use and disclosures please visit www.spdji.com/terms-of-use. Original Post Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors. Continue reading →

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What Recession?

Posted on July 18, 2022 by Lawrence Fuller

Dzmitry Dzemidovich/iStock via Getty ImagesLast week I discussed the balancing act between slowing the rate of economic growth with tighter financial conditions to bring down the rate of inflation and maintaining just enough growth to avert a recession. It is a fine line we must walk to stay on track for a soft landing, but that remains my base case. Investors panicked midweek when the headline inflation number for June hit a new high of 9.1%, increasing the probability of a full-percentage-point rate increase by the Fed at the end of the month to an almost certainty. That sent risk asset prices reeling. Yet the markets staged a huge rebound on Friday, due to a better-then-expected retail sales report for June, as well as forward-looking indicators on the inflation front that tempered expectations of tighter monetary policy. Edward Jones A more pessimistic view of the retail sales report would conclude that the entire gain of 1% in June was a function of higher prices, but the important thing is that consumers were still spending, despite the higher prices. They may be saying they are miserable, but they are drowning their sorrows in bars and restaurants with both discretionary spending categories the largest contributors to June’s gain. This is in no way indicative of a recession, which increases the likelihood that we are still on the path for a soft landing. Bloomberg The underlying strength of the retail sales report was coupled with a decline in longer-term inflation expectations in the University of Michigan’s consumer sentiment survey. Consumers now see prices increasing at a 2.8% annual rate over the next five to 10 years, which is down from June’s 3.1% and at a one-year low. They see prices increasing at a 5.2% rate over the next year, which is down from 5.3% last month. As I have said many times before, markets respond to rates of change, and these rates are moving in favorable directions. More good news came from the assessment of current conditions, which rose to 57.1, due largely to the decline in gasoline prices. Overall, the consumer sentiment index nudged modestly higher in July to 51.1, which is just above the June low. I have discussed many of the commodities falling in price in recent weeks, which should feed into lower prices of goods and services during the second half of this year. The most important of these is oil, which is now resulting in lower prices at the pump. In another development, the supply-chain bottlenecks that led to shortages of just about everything over the past year have now eased in each of the last three months, which should help to further reduce inflationary pressures. Bloomberg Another way to monitor the health of the global supply chain is to track the number of times the word “shortage” is mentioned in the monthly Beige Book survey conducted by the Fed. Here too we are seeing a gradual healing in the form of fewer references to shortages of materials, workers, and other inputs. Bloomberg The most ardent of bears on Wall Street are now turning to second quarter earnings reports for new reasons to sell stocks with expectations for deteriorating margins, due to rising costs and weakening demand. Yet rising costs and expectations for weakening demand are the reasons why stocks had their worst six-month performance to start a year since 1970! The market discounted this news already, and the stock market indexes will start to rebound well in advance of any improvements in costs or demand. I think that is already happening with June marking the low for this cycle. If stocks don’t look back, the inevitably conversion of Wall Street bears to bulls will provide additional demand for risk assets down the road. Bloomberg The performance of bank stocks on Friday is a perfect example. After mixed reviews for some of the sectors largest banks, namely JPMorgan and Morgan Stanley, the sector soared at the end of the week to lead the market higher. Valuations are already reflecting a deceleration in business activity, but the stock prices should start to look forward to a second half and 2023 recovery. Finviz After purging the markets of speculative investment activity over the past year, investment dollars should continue to rotate between asset classes and sectors of the market in search of growth at a reasonable price. I still think the market climbs a wall of worry during the second half of the year, as the consensus shifts its concerns from higher prices to fears of slowing growth. Economic Data Housing market data for the month of June is the focus this week, and it show a softening under limited supply and rising borrowing costs. I will be very interested in the mid-month surveys of manufacturing and service sector managers for signs of economic strength and weakness in July. MarketWatch Technical Picture We look poised to challenge the 50-day moving averages for all the major market indexes this week, especially with a strong start to trading in the futures markets this morning. That would be the first positive development on the technical front in a long time. Stockcharts Continue reading →