Archive for Economics & Fundamentals – Page 133

17 Oct

Lumber Stocks Are Over Valued and Poised for a Plunge

Source: Ron Struthers  (10/15/22)

 Markets will remain in a bear market for some time, and it is best to look for short trades. Lumber stocks ran up in price with high lumber prices and a post-Covid-19 recovery in the economy. They are priced too high and not reflecting lower lumber prices and a softer housing market induced by a coming recession.

Canada Bank Stocks

I will try to pinpoint that. This past Tuesday, the Canadian bank stocks broke down on the charts, except for Royal Bank, which managed to hold at its July low. I show the chart here on CIBC where we have the March 2023 $65 Put option that has a good gain now.

I suggested selling half our Bank of Nova Scotia in March 2023 for $80 Put where we have a 100% gain. The bank stocks are starting to price in a recession and a plunging real estate market. I expect they could test their 2020 Covid lows.

TD Bank had forecast that Canadian house prices would fall -19% by end of 2022. Now they are predicting another -11.2% in 2023. That works out to about a -28% drop, coming in line with my -30% or more prediction. TD’s Sondhi expects home sales to drop -20% below pre-pandemic levels.

That will probably mean a drop in housing construction and lumber prices that have already fallen to pre-pandemic levels. The housing in the U.S. is a different story as it was not so highly leveraged as Canada, but U.S. housing starts have fallen with a combination of a weaker market with labor and supply shortages.

US Housing

That said, an economic slowdown and recession will negatively affect U.S. housing too. Surprise, surprise, surprise, as Gomer Pyle would say.

Well, you should not be, as I have been warning for a year. The September report is the seventh out of nine CPI readings this year to have topped expectations, according to Michael Brown, the senior market analyst at Caxton.

As I have been commenting numerous times, this inflation is entrenched and will be very tough to tame. Year-over-year CPI retreated to 8.2% last month from 8.3% in August, while the annualized increase in core CPI, which strips out volatile food and energy prices, rose to 6.6% from 6.3%. Both numbers came in higher than economists polled by the Wall Street Journal had expected.

The 0.6% core versus a Wall Street forecast of 0.4% was a big shock. The increase in the core rate over the past year climbed to a new peak of 6.6% from 6.3%, marking the biggest gain in 40 years. Take note, it is the core (PCE) that the Fed focuses on.

Markets initially plunged Thursday on the bad inflation report and then rallied in one of the biggest reversals I have ever witnessed. S&P futures peaked +1.57% ahead of the CPI release, bottomed out -2.4%, and the S&P 500 closed +2.6% with a round trip intraday range of 5.52%, according to Deutsche Bank.

The reversal is impressive, and I show a chart on the popular Spyder ETF that represents the S&P 500. What is noteworthy, the volume was not very impressive for such a move. This is a powerful reversal from a new low indicated by a strong engulfing bullish white candle.

All the talk I heard was about this is peak inflation, the market has bottomed, blah blah blah. We could have a bear market rally, and that is it. Bear markets bottom when everyone is bearish and calling for new lows, not bottoms and reversals. This alone convinces me this is no bottom but could be another bear trap a rally emerges.

Thursday could just be a one-day wonder, but if we do get a bear rally, I marked in resistance levels that would relate to 3,700 and 3,900 on the S&P 500. Friday, markets bounced lower off the 3,700 area. I would be surprised if the market could move much above 3,900; all the problems facing the economy and markets have not improved and will probably get worse before they get better.

I commented and had a chart on lumber in May 2021 and called it a bubble top. As it turned out, I was within days of calling that top. Times then were too unpredictable to suggest a way to benefit from lumber decline, but not today.

Lumber

This is a monthly chart until the end of September, and the current lumber price has rallied a little to about US$500. With a recession and weak housing, I expect we will see a drop to $300 and possibly lower.

Lumber prices are back to pre-pandemic levels, but the lumber stocks are still at lofty levels and not priced in a weaker market. They are great short candidates now. U.S. housing starts in June were down to 1.6 million annualized units, their lowest level since September 2021. In July, U.S. housing starts fell further to 1.45 million annualized units but rebounded in August to 1.58 million. Weaker numbers are in store with a Fed-induced recession. I think the best two to short are West Fraser Timber (WFG:NYSE) and Boise Cascade (BCC:NYSE).

Both companies are focused a lot on the lumber market, with West Frazer affected more by Canada and the Canadian housing market than Boise.

The U.S. Commerce Department said Thursday it will decrease the duty rate for most Canadian lumber producers to 8.59%, compared with the current 17.91%.

The Commerce Department had made its intentions known in January to reduce tariffs, proposing a preliminary duty rate of 11.64%, and has now reduced that amount further with the final rate of 8.59%.

This has probably been accounted for in the recent rally in lumber prices.

West Fraser has grown beyond the company’s original base in British Columbia and today is one of the largest lumber and OSB manufacturers in the world.

You can see from the slide above from West Frazer’s Q2 presentation that CA$ earnings are about 100% lumber and Engineered Wood Products (EWP), which are strands, fibers, veneers, or particle boards bound together with strong adhesive.

Currently, Boise looks like a very solid company.

There was a substantial earnings decline from Q1 to Q2, and lumber prices have seen a further decline in Q3.

West Frazer also shipped a lot more volume in Q2 over Q1, with lumber shipments up +17% as transportation constraints eased in Western Canada. OSB (board) shipments were also up 10%. This was shown on slide six of their presentation, with slide 16 below showing huge dependence on housing.

The Housing Market

It does not take a rocket scientist to know that a recession and rapidly rising interest rates will crush the housing markets. Credit Suisse says.

“Our lower estimates reflect our expectation of a sharp slowing of housing turnover and a reduction in home improvement spending in 2023 based on this lower turnover,” wrote analyst Dan Oppenheim in a note to clients Friday.

West Frazer stock ran up in price because of the housing boom and high lumber prices caused by Covid-19 policies. Lumber prices have come down, and the housing boom is ending as North America falls into a recession.

The stock ran up about 120% from around CA$60 in 2019 to the 2022 high of CA$132, and it is currently not reflecting lower lumber prices and a looming recession with a housing slowdown.

I expect the stock can easily drop to around $66 and, with a bad recession, could easily see prices back to around $40. I would sell the stock, short it, and/or buy Put Options.

I like the February 2023 $110 Put for about $14. There is little activity on these, but on the U.S. side, in February 2023, $70 Put around $5.00 has more trading, showing huge dependence on housing.

Boise Cascade’s recent price was $58.60.

Boise is totally focused on the U.S., and that is why I prefer West Frazer more of a short because of the Canadian market exposure.

Nevertheless, I expect Boise stock will take quite a haircut in a poor housing market driven by high-interest rates and a U.S. recession. Boise also has a big focus on residential real estate and home improvements.

What I am saying is the good times are over, so sales and profits have peaked and will soon decline.

They are one of the largest U.S. wholesale building products distributors, with 38 warehouse centers and one truss plant.

This partial slide on the right from their presentation is interesting because it shows that 79% of sales were from their Building Materials distribution segment but only accounted for 49% of profits. It is a clear sign that high lumber prices have driven high profits in their Wood Products Division. As I mentioned above, lumber prices have dropped further in Q3.

Currently, Boise looks like a very solid company, as shown in the slide below from their presentation, and had strong sales and earnings growth since 2020. What I am saying is the good times are over, so sales and profits have peaked and will soon decline.

Boise gives this warning in their Q2 financials: “As a manufacturer of certain commodity products, we have sales and profitability exposure to declines in commodity product prices and rising input costs. Our distribution business purchases and resells a broad mix of commodity products with periods of increasing prices, providing the opportunity for higher sales and increased margins, while declining price environments expose us to declines in sales and profitability. We expect future commodity product pricing and commodity input costs to be volatile in response to economic uncertainties, industry operating rates, transportation constraints or disruptions, net import and export activity, inventory levels in various distribution channels, and seasonal demand patterns. EWP and general line products have historically experienced limited price volatility but are also subject to price erosion as economic activity slows. “

Boise has a very similar chart to West Frazer, just at a different price level. The percentage gain from 2019 and the potential percentage drop are around the same. For Put options, I like January 2023, $60 Put for around $6.00.

Struthers Stock Report Disclaimers: 

All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The author/publisher of this publication has taken every precaution to provide the most accurate information possible. The information & data were obtained from sources believed to be reliable, but because the information & data source are beyond the author’s control, no representation or guarantee is made that it is complete or accurate.

The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Because of the ever-changing nature of information & statistics the author/publisher strongly encourages the reader to communicate directly with the company and/or with their personal investment adviser to obtain up to date information.

Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial adviser & is not acting as such in this publication.

Charts provided by author.

Disclosures: 

1) Ron Struthers: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.

2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.

4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services, or securities of any company mentioned on Streetwise Reports.

5) From time to time, Streetwise Reports LLC and its directors, officers, employees, or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in the securities mentioned. Directors, officers, employees, or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

 

Economics & Fundamentals Opinions
17 Oct

Inflation risks are still skewed upward. China is targeting green energy

By JustForex

The US dollar rose about 0.45% last week, helped by rising US Treasury bond yields. While the overall annual consumer price Index slowed slightly in September, the core Index increased to its highest level since 1982, a sign that price pressures in the US economy remain consistently high. With inflation risks skewed upward, the Fed is likely to continue raising interest rates in the coming months, even if a cycle of aggressive tightening triggers a recession in the economy. On Saturday, the US Fed spokesman Bullard said last week’s consumer price Index data showed that inflation had become “harmful” and left the door open for a 75 basis point rate hike at the upcoming Fed meetings in November and December, but added that it’s still too early to talk about it.

At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 1.34% (+0.73% for the week), and the S&P500 Index (US500) lost 2.37% (-1.77% for the week). The technology Index NASDAQ (US100) fell by 3.08% on Friday (-3.18% for the week).

This week is the start of the third-quarter earnings season in the United States. Analysts expect S&P 500 corporate earnings to rise 4.1% year-over-year, the slowest growth since the fourth quarter of 2020.

Bank of Canada Governor Tiff Macklem said there was a “broad consensus” at the IMF and World Bank meeting that inflation is the most immediate threat to “the present and the future.”

Equity markets in Europe were mostly up on Friday. German DAX (DE30) gained 0.67% (+2.15% for the week), French CAC 40 (FR40) added 0.90% (+2.16% for the week), Spanish IBEX 35 (ES35) increased by 0.46% (-0.12% for the week), British FTSE 100 (UK100) closed Friday with 0.15% (-1.89% for the week).

According to Pierre Wunsch of the ECB Governing Council, government efforts to ease the energy crisis risk forcing the European Central Bank to raise interest rates more aggressively. Wunsch believes that it is already “reasonable” for the ECB to raise the cost of borrowing to 3% from 0.75%. Wunsch also added that a technical recession, usually defined as two consecutive quarters of shrinking output, is now a “baseline scenario” in Europe. However, that by itself is not enough to keep inflation under control.

Britain’s new finance minister, Jeremy Hunt, promised to restore confidence in the British economy by fully reporting on the government’s tax and spending plans. British Prime Minister Liz Truss appointed Hunt in an attempt to salvage her leadership as confidence in her ability to run the country dwindled. Investors have been actively selling British government bonds since Sept. 23, when Hunt’s predecessor, Kwasi Kwarteng, announced a series of unwarranted tax cuts without publishing a series of independent economic forecasts. The side effects forced the Bank of England to intervene in an emergency to protect pension funds and increased the cost of mortgages, further exacerbating the finances of Britons. The first test for Hunt and Truss will come as early as today when trading on the bond market resumes without the support of the Bank of England’s bond purchase program, which expired on Friday.

In the oil market, the situation remains tense. The White House noted last week that OPEC+ production cuts would boost Russia’s revenues, increasing funding for its invasion of Ukraine. In response, Saudi Arabia’s minister said the October 5 decision to cut production by 2 million BPD was unanimous and based on economic factors, with OPEC+ countries seeking to maintain balance in oil markets. Experts believe that OPEC+ is manipulating prices to keep the price of “black gold” above $90 per barrel.

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) jumped by 0.43% over the week, Hong Kong’s Hang Seng (HK50) decreased by 4.94% over the week, and Australia’s S&P/ASX 200 (AU200) lost 0.06% over the week.

In his speech at the opening session of the ruling Communist Party’s five-year congress, Xi Jinping said that China will prioritize protecting the environment and promoting a green lifestyle and that preserving nature is an integral part of building a modern socialist country. China will support low-carbon industries, pursue an “energy revolution,” and build a new energy system while continuing to promote the clean and efficient use of coal. “China’s international influence, attractiveness, and ability to shape the world have increased significantly,” Xi said Sunday in Beijing in a wide-ranging speech. Nevertheless, he warned of a more volatile international environment, saying that China must be prepared for “strong winds, high waves, and even dangerous storms.” Analysts believe that the issue here is an increase in tensions between the US and China. Beijing’s actions to suppress dissent in Hong Kong and Xinjiang, its lack of transparency about Covid origins, its partnership with Russia amid its invasion of Ukraine, and its more aggressive stance toward Taiwan have all increased tensions between the world’s two largest economies. Xi Jinping is expected to retain his position and consolidate his power when the new leadership is announced in about a week. Economists also expect Beijing to miss its annual gross domestic product target by a wide margin this year for the first time since it began setting such targets in the early 1990s.

Bank of Japan Governor Kuroda said Saturday that inflation in Japan is rising mainly because of cost-push factors, so the Bank of Japan will continue to keep its monetary policy soft.

On the commodities market, lumber futures (+10.55%), oats (+4.45%), and orange juice (+1.43%) showed the biggest gains by the end of the week. Futures on silver (-10.15%), coffee (-9.54%), palladium (-8.59%), WTI oil (-7.65%), Brent oil (-6.6%), natural gas (-4.03%), gasoline (-3.77%) and gold (-3.46%) showed the biggest drop.

S&P 500 (F) (US500) 3,583.07 −86.84 (−2.37%)

Dow Jones (US30) 29,634.83 −403.89 (−1.34%)

DAX (DE40) 12,437.81 +82.23 (+0.67%)

FTSE 100 (UK100) 6,858.79 +8.52 (+0.12%)

USD Index 113.30 +0.94 (+0.83%)

Important events for today:
  • – China Export (m/m) at 06:00 (GMT+3);
  • – China Imports (m/m) at 06:00 (GMT+3);
  • – Japan Industrial Production (m/m) at 07:30 (GMT+3);
  • – Italian Consumer Price Index (m/m) at 11:00 (GMT+3);
  • – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+3);
  • – Canada BoC Business Outlook Survey at 17:30 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
14 Oct

Week Ahead: What’s Next For British Pound?

By ForexTime

The past few weeks have been explosively volatile for sterling thanks to the ongoing drama revolving around the government’s mini-budget and Bank of England (BoE).

After plunging to an all-time low back in late September, bulls have fought valiantly – pushing prices back to levels before the chaos unfolded. However, the currency is certainly not out of the woods yet. With uncertainty and confusion mounting over the Bank of England’s next move and talks of more fiscal policy U-turns on the mini-budget, this could translate to fresh pound volatility in the week ahead.

Before we discuss the technical and fundamental forces that may influence sterling, here are the scheduled economic data releases/events in the coming week:

Monday, 17 October

  • NGN: Nigeria Inflation
  • USD: Empire manufacturing
  • EUR: ECB Vice President Luis de Guindos, ECB Chief Economist Philip Lane speech

Tuesday, 18 October

  • CNH: China 3Q GDP, Retail sales, industrial production
  • AUD: Reserve Bank of Australia minutes
  • EUR: Germany ZEW survey expectations
  • USD: Industrial production, NAHB housing market index

Wednesday, 19 October

  • EUR: Euro area inflation
  • GBP: UK inflation
  • USD: Chicago Fed President Charles Evan, Minneapolis Fed President Neel Kashkari, St. Louis Fed President James Bullard speech

Thursday, 20 October

  • CNH: China loan prime rates
  • EUR: Germany PPI
  • GBP: Gfk consumer confidence
  • USD: US existing home sales, initial jobless claims

Friday, 26 August

  • EUR: Euro area consumer confidence
  • GBP: UK retail sales

The BoE and new Conservative government are not seeing eye-to-eye, with less than 24 hours until the central bank ends its emergency bond-buying program. Reports of Chancellor of the Exchequer Kwarteng leaving the IMF meetings prematurely to address the current crisis are likely to leave market players on edge. Given how Liz Truss is speculated to remove further elements of the mini-budget over the weekend, Monday’s market open for sterling could shock investors. Ultimately, the current developments expose the UK economy to downside risks at a time when rising inflation is squeezing UK households.

Speaking of inflation, the UK releases inflation figures for September mid-week. According to Bloomberg, inflation is expected to remain unchanged at 9.9% YoY. A report that meets or exceeds expectations may fuel speculation around the BoE moving ahead with a 100-basis point supersized hike. While such a move could inject the pound with short-term confidence, gains are likely to be capped by recession fears. Alternatively, signs of inflationary pressure cooling could reduce BoE rate hike bets – weakening the pound. Other key economic reports to keep an eye on range from the Gfk consumer confidence to retail sales.

Looking at the technical picture, the GBPUSD could swing both ways in the week ahead. If prices can keep above 1.13 the next key level of interest can be found at 1.15 which is just below the 50-day Simple Moving Average. Beyond this point, prices could venture towards the previous lower high around 1.173. Alternatively, sustained weakness under 1.13 could trigger a selloff towards 1.0925 and lower.

Redirecting our attention away from sterling, it may be worth keeping a close eye on stock markets – especially with earnings in full swing. It’s been a rough year for equity markets with the S&P500 down over 22% year-to-date. Investors are likely to closely scrutinize the upcoming earnings for clues on companies’ growth prospects in high interest and strong dollar environment. On the data front, there will be some key economic reports from major economies like China, the United States, and Europe to name a few.

China’s third quarter GDP report could be a market shaker on Tuesday depending on how investors react to the print. Consensus is predicting 3.5% but Bloomberg Economics is predicting 2.7% year on year. The week will also be jam-packed with numerous speeches from various financial heavyweights. With so much going on, it may be wise to strap up and be prepared for another eventful week ahead for financial markets.

Forex-Time-LogoArticle by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

Economics & Fundamentals Financial News
14 Oct

Core inflation in the US rose to a 40-year-high. PACE recognized the Russian regime as a terrorist

By JustForex

The US consumer price Index rose by 0.4% last month, but in annual terms, the Index declined from 8.3% to 8.2%. Core inflation, which excludes food and energy prices, rose by 0.6% last month, and in annual terms, the core Index increased from 6.3% to 6.6%, the highest level since 1982. So overall inflation has shown signs of declining, while core inflation has shown signs of accelerating. The inflation data would likely perpetuate an additional 75 basis point interest rate hike at the November FOMC meeting and spurred speculation of a fifth consecutive increase of the same size in December. On the other hand, this scenario was initially planned by the experts, which is why the stock market reacted positively to this news. However, it should be noted that when the news was published, the indices fell sharply, but by the end of the trading session they recovered. At the close of the stock market yesterday, the Dow Jones Index (US30) gained 2.83%, and the S&P500 Index (US500) added 2.83%. The NASDAQ Technology Index (US100) jumped by 2.23% yesterday.

Leading economist David Rosenberg predicts that US inflation will fall below 3% next year and warns that a Fed rate hike is fraught with disaster. According to Rosenberg, the Fed is fighting inflation too hard as price pressures wane. The Rosenberg Research founder noted that the Fed is rapidly raising interest rates and cutting its balance sheet even though stocks are in a bear market and the macroeconomic outlook is extremely unclear. Meanwhile, the yield curve is inverted, a sure sign of an approaching recession. Rosenberg warned that if the Fed continues to tighten its monetary policy, it could lead to lower home prices and cause a credit crunch in the banking sector. It could also weaken consumer confidence and spending and prolong the economic downturn.

European stocks closed yesterday in positive territory. Germany’s DAX (DE30) gained 1.51%, France’s CAC 40 (FR40) increased by 1.04%, Spain’s IBEX 35 (ES35) jumped by 1.21%, Britain’s FTSE 100 (UK100) closed at 0.35% yesterday.

Germany’s consumer price Index rose from 7.9% to a record 10% on an annual basis. Huge increases in energy prices are still the main reason for high inflation. In addition to increases in all energy prices due to the war and crisis, the inflation rate was affected by supply disruptions and significant price increases in the preceding stages of the economic process. As a consequence, the prices of other goods and services, including many food products, also rose. Analysts predict that Germany will slide into recession in 2023. “We are currently experiencing a serious energy crisis that threatens to turn into an economic and social crisis,” German Economy Minister Robert Habeck warned in presenting the official fall economic forecasts. France and Spain will release inflation data today.

The Parliamentary Assembly of the Council of Europe (PACE) recognized the Russian regime as a terrorist. 99 out of 100 delegates voted in favor. The Council of Europe resolution also said that an international tribunal should be created as soon as possible, Russia’s tenure in the UN Security Council is illegitimate, and Ukraine should be given modern air defense systems to protect civilians. International norms now define Putin’s regime as a terrorist, i.e. criminal.

Asian markets mostly traded lower yesterday. Japan’s Nikkei 225 (JP225) lost 0.60% over the day, Hong Kong’s Hang Seng (HK50) ended yesterday down 1.87%, and Australia’s S&P/ASX 200 (AU200) closed yesterday down 0.07%.

Inflation in China rose to its highest level since April 2020 as stimulus measures and holiday spending drove prices higher. The consumer price index rose from 2.5 to 2.8% year-over-year in September. But PPI inflation, which measures inflation among businesses, declined in September, reflecting the continued weakness of China’s manufacturing sector, hit by COVID, this year. This Sunday will be the 20th Congress of the Chinese Communist Party, which is expected to provide insight into China’s economic policy over the next five years. Beijing has pledged to increase stimulus measures to support the economic slowdown. But the country also has to balance adopting supportive measures without harming the yuan.

S&P 500 (F) (US500) 3,669.91 +92.88 (+2.60%)

Dow Jones (US30) 30,038.72 +827.87 (+2.83%)

DAX (DE40) 12,355.58 +183.32 (+1.51%)

FTSE 100 (UK100) 6,850.27 +24.12 (+0.35%)

USD Index 112.47 -0.85 (-0.75%)

Important events for today:
  • – China Consumer Price Index (m/m) at 04:30 (GMT+3);
  • – China Producer Price Index (m/m) at 04:30 (GMT+3);
  • – Canada Wholesale Sales (m/m) at 15:30 (GMT+3);
  • – US Retail Sales (m/m) at 15:30 (GMT+3);
  • – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
13 Oct

Soaring inflation prompts biggest Social Security cost-of-living boost since 1981 – 6 questions answered 

By John W. Diamond, Rice University 

Social Security is set to boost the benefits it provides retirees by 8.7%, the biggest cost-of-living adjustment since 1981. It comes as sky-high inflation continues to eat into incomes and savings.

The changes are set to take effect in January 2023 and were announced following the release of the September 2022 consumer price index report, which showed inflation climbing more than expected during the month, by 0.4%.

The automatic adjustment will surely come as a relief to tens of millions of retirees and those who receive supplemental security income who may be struggling to afford basic necessities as inflation has accelerated throughout 2022. But an annual adjustment wasn’t always the case – and other government benefits and programs deal with inflation differently.

John Diamond, who directs the Center for Public Finance at Rice’s Baker Institute, explains the history of the Social Security cost-of-living, or COLA, increase, what other benefits are adjusted for inflation and why the government makes these changes.

1. How fast is the cost of living rising?

The latest data, for September, shows average consumer prices are up 8.2% from a year earlier. The monthly gain of 0.4% was double what economists surveyed by Reuters had expected.

More troubling, so-called core inflation – which excludes volatile food and energy prices – gained even more in September, ticking up by 0.6%. Core inflation is a measure that’s closely watched by the Federal Reserve, as it helps show how pervasive and persistent inflation has become in the economy.

2. How are Social Security benefits adjusted for inflation?

Automatic adjustments to Social Security benefits began in 1975 after President Richard Nixon signed the 1972 Social Security amendments into law.

Before 1975, Congress had to act each year to increase benefits to offset the effects of inflation. But this was an inefficient system, as politics would often be injected into a simple economic decision. Under this system, an increase in benefits could be too small or too large, or could fail to happen at all if one party blocked the change entirely.

Not to mention that with the baby boomers – those born from 1946 to 1964 – entering the labor force it was already clear that Social Security would face long-term funding issues in the future, and so putting the program on autopilot reduced the political risk faced by politicians.

Since then, benefits have climbed automatically by the average increase in consumer prices during the third quarter of a given year from the same period 12 months earlier. This is based on a version of the consumer price index meant to estimate price changes for working people and has been rising slightly faster than the overall pace of inflation.

While helpful, these inflation adjustments are backward-looking and imperfect. For example, 2022 Social Security benefits increased by 5.9% from the previous year, even though inflation throughout this year has been significantly higher – which means the higher benefits weren’t covering the higher cost of living. Thus, the 2023 increase in benefits primarily offsets what was lost over the previous year.

3. Are the benefits taxable?

A growing portion of Social Security benefits are taxed in the same way as ordinary income, except at different threshold with various caps and percentages. Only 8% of benefits were subject to taxation in 1984, but that’s climbed to almost 50% in recent years. That percentage will likely continue to increase as the taxable thresholds are not adjusted for inflation.

For example, if an individual filer’s income, including benefits, is below US$25,000, none of that is taxed. But up to 50% of a person’s benefits may be taxed at incomes of $25,000 to $34,000. After that, up to 85% of their benefits may be taxed.

Such a big increase in Social Security benefits likely means some people who paid no tax will now have to pay some, while others will see larger increases in their tax liability.

4. Why does the government adjust benefits for inflation?

Rapid gains of inflation, like the kind the U.S. and many other countries are currently experiencing, can have significant impacts on the finances of households and businesses.

For example, it might mean seniors cutting back on heating or food. Government policies generally try to account for this to reduce the negative impacts that rising prices can have on those with limited or fixed resources.

In addition, reducing the impacts of price changes creates a more efficient and fair allocation of resources and reduces the arbitrary outcomes that would otherwise occur.

5. What other government programs typically get a COLA?

Other government programs and benefits also increase to account for inflation.

The U.S. Department of Agriculture estimates the cost of its Thrifty Food Plan each June and adjusts Supplemental Nutrition Assistance Program or SNAP benefits – formerly known as food stamps – in October of each year. Beginning in October 2022, food stamp benefits rose by 12.5%, which helps make up for the largest increases in food prices since the 1970s.

In addition, the federal poverty level is adjusted for changes in the consumer price index annually by the Department of Health and Human Services, an adjustment that affects a number of government-provided benefits, such as housing benefits, health insurance and others, including SNAP benefits.

6. Does the tax system also adjust for inflation?

While some aspects of the tax code adjust for inflation, others do not.

For example, income tax bracket thresholds, the size of the standard deduction, alternative minimum tax parameters and estate tax provisions all increase annually for inflation. That means come tax filing season next year, U.S. tax filers will likely see big changes in all these items.

But examples of provisions that are not adjusted for inflation include the maximum value of the child tax credit and the $10,000 cap on the deduction of state and local taxes. In addition, the threshold that determines who is liable for the net investment income tax – the additional 3.8% tax on investment and passive income for taxpayers above a certain income level – doesn’t adjust, which means each year more individuals are subject to it.The Conversation

About the Author:

John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions
13 Oct

Are You Prepared for Widespread Bank Failures?

“This time, the world economy appears to be on much shakier footing”

By Elliott Wave International

The ideal time to prepare for most anything in life, especially a potential circumstance that’s adverse, is before it happens.

The problem is: Many people don’t know what will happen in their lives ahead of time.

However, sometimes warnings are provided yet they’re ignored or not taken seriously. A current warning from Elliott Wave International which people are urged to take very seriously is that the economic slowdown could morph into something far worse than a garden-variety recession.

Here’s what Robert Prechter’s Last Chance to Conquer the Crash has to say:

In 2008-2009, some U.S. banks came under pressure of insolvency, just as the first edition of Conquer the Crash predicted. Fed bailouts kept most of them open. In the next depression, bank runs and mass closings are far more probable.

Indeed, a troubling sign for the banking industry has already started to develop.

Here’s an Oct. 3 headline (Business Insider):

Credit Suisse is fending off concerns about its financial health, fanning fears of another Lehman Brothers moment that could roil the global financial system. …

The next day (Oct. 4), Barron’s had the straightforward headline:

Credit Suisse Is In Deep Trouble.

In a nutshell, the Swiss banking giant plans a massive restructuring, and executives recently had to reassure major clients and investors about the bank’s liquidity.

Concerns about the financial health of Credit Suisse doesn’t mean that a systemic banking crisis will start tomorrow or next week. However, it may be a good idea to check out the financial health of the bank or banks with which you do business, especially considering the broad backdrop — as represented by these headlines:

  • Global Manufacturing Index Contracts for First Time Since 2020 (Bloomberg, Oct. 3)
  • IMF presents ‘darkening outlook’ for global economy (UPI News, Oct. 6)

Days before that global economy headline published, the October Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, showed this chart and said:

This chart of Global Real Economic Activity … shows that the world economy is heading into an extraordinary period of economic contraction. The trendline points out a long-term divergence from the last peak, in May 2008, which followed the Dow Industrials’ October 2007 top by eight months. The latest peak in the index came in October 2021. … This time, the world economy appears to be on much shakier footing.

Now is the time to prepare for what may be just around the corner.

One way to prepare is to get a handle on the stock market’s trend because the stock market tends to lead the economy.

The Elliott wave model can help you analyze the stock market.

If you’re unfamiliar with the Elliott wave model or need a refresher, the definitive text on the subject is Frost & Prechter’s Elliott Wave Principle: Key to Market Behavior. Here’s a quote:

All waves may be categorized by relative size, or degree. The degree of a wave is determined by its size and position relative to component, adjacent and encompassing waves. Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today’s practitioners have become comfortable with Elliott’s nomenclature.

If you’d like to read the entire online version of this Wall Street classic, you may do so for free once you join Club EWI, the world’s largest Elliott wave educational community.

A Club EWI membership is also free and members enjoy complimentary access to a wealth of Elliott wave resources on investing and trading.

Just follow this link to get started: Elliott Wave Principle: Key to Market Behavior — free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Are You Prepared for Widespread Bank Failures?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Economics & Fundamentals Financial News
13 Oct

Investor attention today is focused on US inflation data

By JustForex

The September FOMC meeting minutes showed that policymakers increased their estimate of the Fed rate trajectory needed to reach their goal. At the September meeting, voting members projected that rates would reach 4.4% in 2022 and peak at 4.6% in 2023, with a “Fed reversal” planned for the second half of 2023. But this is no surprise to the market, so the reaction from financial markets was restrained. According to FOMC spokesman Kashkari, if the US economy enters a steep decline, the Fed can always stop raising rates or slow them down, especially if there are signs of a rapid decline in inflation. So the main data of interest to investors is the US consumer inflation rate, which will be released today. A decline in inflation could give a sharp boost to stock indices as US Federal Reserve policy becomes less aggressive in upcoming meetings. Conversely, an inflation acceleration would boost the dollar index and government bond yields, leading to even more stock declines. The US Producer Price Index, which shows the rate of inflation between companies, rose another 0.4% last month, but on an annualized basis, the index fell from 8.7% to 8.5%. So there is hope for a decline in consumer inflation.

As the stock market closed Wednesday, the Dow Jones Index (US30) decreased by 0.10%, and the S&P 500 Index (US500) fell by 0.33%. The NASDAQ Technology Index (US100) was down by 0.09% yesterday.

ECB spokesman Holzmann yesterday unexpectedly spoke not about the ECB but about the US Federal Reserve, saying that the US Central Bank needs to raise interest rates by 75 bps in October and by 50 bps to return the US to an inflation-neutral stance.

The IMF on Tuesday lowered its forecast for global growth in 2023 and said policies to rein in high inflation could add risk to the global economy. Even President Joe Biden said this week that the US could face a “very slight” recession.

European stocks fall for the fifth consecutive session as investors worry about the prospect of a global economic slowdown and shrinking corporate profits due to higher interest rates. Germany’s DAX (DE30) decreased by 0.39%, France’s CAC 40 (FR40) fell by 0.25%, Spain’s IBEX 35 (ES35) lost 1.29%, Britain’s FTSE 100 (UK100) closed yesterday down by 0.86%.

European Central Bank President Christine Lagarde said policymakers are determined to lower inflation and said cooperation with other monetary and fiscal authorities is needed for success. European Central Bank Governing Council spokesman Klaas Knot said that a “sustained effort” is needed to bring inflation under control, reiterating that at least two more “significant” interest rate hikes should follow last month’s 75-basis-point interest rate hike.

The Bank of England’s monetary policy report said: “The invasion of Ukraine has led to a sharp rise in wholesale gas prices in Europe. Household incomes are falling due to higher energy bills. Corporate profits are shrinking because of higher energy costs. General inflation has risen to unacceptably high levels. For a net energy importer like the UK, rising global energy prices are affecting national income: the cost of what the country buys from the rest of the world has risen sharply relative to the price of what it sells. Higher energy prices reduce household spending and reduce economic activity. Given where the UK economy is now, the Bank of England intends to act decisively on monetary policy at the next scheduled MPC meeting.” Thus, analysts are predicting a 0.75-1% interest rate hike.

Aluminum prices on the London Metal Exchange (LME) jumped by 7% percent Wednesday after it was reported that the US is considering a ban on Russian aluminum in response to the invasion of Ukraine. Last week, the LME presented a discussion paper on the possibility of banning Russian aluminum, nickel, and copper from trade and storage in its system.

The International Monetary Fund’s economic growth forecast showed Saudi Arabia to be the fastest-growing economy among the world’s major economies. Forecasts have been revised upward this year due to a booming oil sector combined with strong growth in the non-commodity sector. According to the preliminary budget statement, Saudi Arabia is forecasting revenue of 1.12 trillion rials ($298 billion) next year.

The oil market remains tight. Two opposing forces are now at work: the economic outlook is the main downside risk, and OPEC+ is the upside potential. The dollar index may change the parity, the dynamics of which will be determined after today’s inflation data.

The UN General Assembly adopted a resolution that does not recognize the “referendums” in the “DPR,” “LPR,” and Kherson and Zaporizhzhia regions. The resolution was supported by 143 countries and opposed by five. Russia, Belarus, Syria, the DPRK, and Nicaragua voted against it.

Asian markets were mostly trading lower yesterday. Japan’s Nikkei 225 (JP225) lost 0.02% over the day, Hong Kong’s Hang Seng (HK50) decreased by 0.78%, while Australia’s S&P/ASX 200 (AU200) gained 0.04%.

Climate change poses a serious threat to China’s long-term prosperity, which emits 27% of the world’s greenhouse gases, but the country is well positioned to meet its climate commitments and transition to a greener economy, the World Bank said.

S&P 500 (F) (US500) 3,577.03 −11.81 (−0.33%)

Dow Jones (US30) 29,210.85 −28.34 (−0.097%)

DAX (DE40) 12,172.26  −47.99 (−0.39%)

FTSE 100 (UK100) 6,826.15 −59.08 (−0.86%)

USD Index 113.28 +0.06 (+0.06%)

Important events for today:
  • – US FOMC member Bowman Speaks at 01:30 (GMT+3);
  • – US Consumer Price Index (m/m) at 15:30 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3);
  • – US Crude Oil Reserves (w/w) at 18:00 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
12 Oct

FOMC minutes and UK data on the schedule

By JustForex

Stock markets continue to fall amid hawkish comments from the Federal Reserve indicating the need to tighten monetary policy further and keep rates higher. As the stock market closed Tuesday, the Dow Jones Index (US30) added 0.12%, while the S&P 500 Index (US500) decreased by 0.65%. The NASDAQ Technology Index (US100) fell by 1.10% yesterday.

Federal Reserve Bank of Cleveland President Loretta Mester echoed recent remarks from other Fed officials, calling for the Fed to continue to raise interest rates to put inflation on a steady downward trajectory to 2%. In anticipation of another significant rate hike, Treasury yields rose to 4%.

The president of the World Bank and the managing director of the International Monetary Fund added caution to the market, warning of the growing risk of a global recession and stating that inflation remains an ongoing problem. The International Monetary Fund warned Tuesday that countries that account for a third of global output could face a recession next year.

Markets are now awaiting key US inflation data this week, which is expected to influence the Fed’s plan to raise interest rates. The minutes of the Fed’s September meeting, which will be released today, will also be monitored for more hawkish signals.

Equity markets in Europe were mostly down yesterday. Germany’s DAX (DE30) fell by 0.43%, France’s CAC 40 (FR40) decreased by 0.13%, Spain’s IBEX 35 (ES35) lost 0.78%, Britain’s FTSE 100 (UK100) closed down by 1.06%.

The UK unemployment rate fell to a new low. If markets are calmer ahead of the Bank of England’s November meeting, the Bank of England is likely to opt for a 75 basis point hike. But if market volatility persists and the pound continues to weaken, the Bank will be forced to act more decisively. Whether we get a 75- or 100-basis-point rate hike will depend on whether the government’s fiscal plan succeeds in stabilizing the markets at the end of October. For now, uncertainty in the UK bond market is forcing investors to sell off the pound and move into safe-haven assets such as the dollar index.

The number of Covid cases in China reached its highest level since August, with the spike coming after an increase in domestic travel during the National Golden Week holiday earlier this month. Shanghai and other major Chinese cities, including Shenzhen, stepped up testing as cases of the coronavirus increased, and some local authorities hastily closed schools, entertainment venues, and tourist spots. As a result, oil prices have fallen 3% since the beginning of this week amid falling demand.

Gold has fallen below $1,700 an ounce. Investors are moving into dollars ahead of key US inflation data this week and before FOMC minutes are released today.

Asian markets traded lower yesterday. Japan’s Nikkei 225 (JP225) lost 2.64% over the day, Hong Kong’s Hang Seng (HK50) fell by 2.23%, and Australia’s S&P/ASX 200 (AU200) was down by 0.34%.

China’s Central Bank on Tuesday spoke out against major exchange rate fluctuations, saying it would take steps to stabilize expectations and keep the yuan stable. The People’s Bank of China (PBOC) also said that the yuan does not necessarily need to weaken against the dollar. The Central Bank said it has plenty of policy options, many tools, and “extensive experience in effectively managing market expectations and ensuring exchange rate stability.

Markets are also waiting for China’s inflation and trade data, due out Friday, to get more signals about a potential economic recovery.

The Bank of Korea (BoK) raised interest rates by 50 basis points to 3%, bringing lending rates to the highest level in a decade. The move comes as the country struggles with inflation hitting a 24-year high this year, hitting Asia’s fourth-largest economy hard.

S&P 500 (F) (US500) 3,588.84 −23.55 (−0.65%)

Dow Jones (US30) 29,239.19 +36.31 (+0.12%)

DAX (DE40) 12,220.25 −52.69 (−0.43%)

FTSE 100 (UK100) 6,885.23 −74.08 (−1.06%)

USD Index 113.25 +0.11 (+0.10%)

Important events for today:
  • – UK GDP (m/m) at 09:00 (GMT+3);
  • – UK Industrial Production (m/m) at 09:00 (GMT+3);
  • – UK Manufacturing Production (m/m) at 09:00 (GMT+3);
  • – UK FPC Meeting Minutes (Tentative);
  • – UK FPC Statement (Tentative);
  • – Eurozone Industrial Production (m/m) at 12:00 (GMT+3);
  • – US Producer Price Index (m/m) at 15:30 (GMT+3);
  • – Eurozone ECB President Lagarde Speaks (m/m) at 16:30 (GMT+3);
  • – US FOMC Meeting Minutes at 21:00 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
11 Oct

Nobel economics prize: insights into financial contagion changed how central banks react during a crisis

By Elena Carletti, Bocconi University 

This year’s Nobel prize in economics, known as the Sveriges Riksbank Prize in Economic Sciences, has gone to Douglas Diamond, Philip Dybvig and former Federal Reserve Chair Ben Bernanke for their work on banks and how they relate to financial crises.

To explain the work and why it matters, we talked to Elena Carletti, a Professor of Finance at Bocconi University in Milan.

Why have Diamond, Bernanke and Dybvig been awarded the prize?

The works by Diamond and Dybvig essentially explained why banks exist and the role they play in the economy by channelling savings from individuals into productive investments. Essentially, banks play two roles. On the one hand, they monitor borrowers within the economy. On the other, they provide liquidity to individuals, who don’t know what they will need to buy in future, and this can make them averse to depositing money in case it’s not available when they need it. Banks smooth out this aversion by providing us with the assurance that we will be able to take out our money when it’s required.

The problem is that by providing this assurance, banks are also vulnerable to crises even at times when their finances are healthy. This occurs when individual depositors worry that many other depositors are removing their money from the bank. This then gives them an incentive to remove money themselves, which can lead to a panic that causes a bank run.

Ben Bernanke fed into this by looking at bank behaviour during the great depression of the 1930s, and showed that bank runs during the depression was the decisive factor in making the crisis longer and deeper than it otherwise would have been.

The observations behind the Nobel win seem fairly straightforward compared to previous years. Why are they so important?

It’s the idea that banks that are otherwise financially sound can nevertheless be vulnerable because of panicking depositors. Or, in cases such as during the global financial crisis of 2007-09, it can be a combination of the two, where there is a problem with a bank’s fundamentals but it is exacerbated by panic.

Having recognised the intrinsic vulnerability of healthy banks, it was then possible to start thinking about policies to alleviate that risk, such as depositor insurance and reassuring everyone that the central bank will step in as the lender of last resort.

In a bank run caused by liquidity (panic) rather than insolvency, an announcement from the government or central bank is likely to be enough to solve the problem on its own – often without the need for any deposit insurance even being paid out. On the other hand, in a banking crisis caused by insolvency, that’s when you need to pump in money to rescue the institution.

What was the consensus about bank runs before Diamond and Dybvig began publishing their work?

There had been a lot of bank runs in the past and it was understood that financial crises were linked to them – particularly before the US Federal Reserve was founded in 1913. It was understood that bank runs made financial crises longer by exacerbating them. But the mechanism causing the bank runs wasn’t well understood.

How easy is it to tell what kind of bank run you are dealing with?

It’s not always easy. For example, in 2008 in Ireland it was thought to be a classic example of bank runs caused by liquidity fears. The state stepped up to give a blanket guarantee to creditors, but it then became apparent that the banks were really insolvent and the government had to inject enormous amounts of money into them, which led to a sovereign debt crisis.

Speaking of sovereign debt crises, the work by Diamond and Dybvig also underpins the literature on financial contagion, which is based on a 2000 paper by Franklin Allen and Douglas Gale. I worked with Allen and Gale for many years, and all our papers have been based on the work of Diamond, and Diamond and Dybvig.

In a similar way to how state reassurances can defuse a bank run caused by liquidity problems, we saw how the then European Central Bank President Mario Draghi was able to defuse the run on government bonds in the eurozone crisis in 2011 by saying that the bank would do “whatever it takes” to preserve the euro.

The prize announcement has attracted plenty of people on social media saying we shouldn’t be celebrating Bernanke when he was so involved in the quantitative easing (QE) that has helped to cause today’s global financial problems – what’s your view?

I would say that without QE our problems would today be much worse, but also that the prize recognises his achievements as an academic and not as chair of the Fed. Also, Bernanke was only one of the numerous central bankers who resorted to QE after 2008.

And it is not only the central bank actions that make banks stable. It’s also worth pointing out that the changes to the rules around the amount of capital that banks have to hold after 2008 have made the financial system much better protected against bank runs than it was beforehand.

Should such rules have been introduced when the academics first explained the risks around bank runs and contagion?

The literature had certainly hinted at these risks, but regulation-wise, we had to wait until after the global financial crisis to see reforms such as macro-prudential regulation and more stringent micro-prudential regulation. This shows that regulators were underestimating the risk of financial crises, perhaps also pushed by the banking lobbies that had been traditionally very powerful and managed to convince regulators that risks were well managed.

If retail banks become less important in future because of blockchain technology or central bank digital currencies, do you think the threat of financial panic will reduce?

If we are heading for a situation where depositors put their money into central banks rather than retail banks, that would diminish the role of retail banking, but I think we are far from that. Central bank digital currencies can be designed in such a way that retail banks are still necessary. But either way, the insights from Diamond and Dybvig about liquidity panics are still relevant because they apply to any context where coordination failures among investors are important, such as sovereign debt crises, currency attacks and so on.The Conversation

About the Author:

Elena Carletti, Professor of Finance, Bocconi University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Economics & Fundamentals Opinions
11 Oct

Russia shells Ukrainian civilians. The White House imposes export restrictions on China

By JustForex

The US Federal Reserve Vice Chair Lael Brainard hinted that the US Central Bank would continue its mission to reduce inflation despite the worsening growth outlook. The policymaker predicts that the recovery in the year’s second half will be limited. A 75 basis point hike in November and a peak rate of 4.60-4.70% is now the main target, but additional hawkish comments could spur additional panic amid a longer tightening cycle. The White House also added fuel to the fire after it unveiled new export restrictions on US companies selling semiconductor chips and other manufacturing equipment to China, which led to the fall of tech companies. As the stock market closed Monday, the Dow Jones Index (US30) decreased by 0.32%, and the S&P 500 Index (US500) fell by 0.75%. The Technology Index NASDAQ (US100) lost 1.04%.

Equity markets in Europe were mostly down on Monday. German DAX (DE30) declined by 0.01%, French CAC 40 (FR40) fell by 0.45%, Spanish IBEX 35 (ES35) was 0.31% lower, British FTSE 100 (UK100) closed yesterday with 0.45% loss.

British government bond prices fell on Monday, indicating that investors have yet to be persuaded by Finance Minister Kwasi Kwarteng’s desire to bolster confidence in the budget. Also, on Monday, the Bank of England expanded the scope of its emergency intervention. But strategists at JPMorgan said they believe long-term British yields will continue to rise, keeping the pound from falling.

The US dollar strengthened sharply in early trading on Monday after Russia launched a series of missile strikes on critical infrastructure in Ukraine and on ordinary residential areas, including the capital Kyiv. A total of 85 missiles and more than 20 kamikaze drones were fired at Ukraine. 43 missiles and 8 drones were shot down. Eight regions of Ukraine were temporarily left without power supply, 19 civilians were killed, and approximately 105 were injured, including children. Nothing strategic, nothing tactical, nothing meaningful, just one-sided terrorism by the Russian Federation. Having suffered serious losses on the front, all Russia has to do is simply shoot at civilians to somehow compensate for its despair and agony.

After the massive missile attack on Ukraine, protests against the war and in support of Ukraine began in European capitals. Estonia is officially considering recognizing Russia as a sponsor of terrorism.

Oil prices fell by 2% yesterday as the dollar index continues to strengthen, and investors are concerned that COVID will reduce demand in China. A strong dollar reduces demand for oil, making it more expensive for buyers using other currencies. Analysts added that the consistent zero COVID-19 policy in China ahead of the Communist Party Congress doesn’t help demand. But it is worth realizing that the fundamental backdrop points to rising oil prices, as OPEC+ last week decided to lower its production target by 2 million barrels per day. At the same time, investors should not forget that the EU sanctions on Russian oil and oil products will come into effect in December and February, respectively.

Asian markets traded lower yesterday. Japan’s Nikkei 225 (JP225) lost 0.71% over the day, Hong Kong’s Hang Seng (HK50) fell by 2.95%, while Australia’s S&P/ASX 200 (AU200) dropped 1.40%.

Shares of chipmakers Anji Microelectronics Tech Co Ltd and Chengdu Xuguang Electronics Co Ltd fell about 20% after the White House unveiled export controls barring Chinese companies from certain semiconductor chips made with US equipment. Technology heavyweights Alibaba Group Holding Ltd, Baidu Inc, and Tencent Holdings Ltd lost 2% to 4%. The US actions threaten to worsen trade ties between the world’s two largest economies and could have deeper economic consequences if China retaliates.

Also in the spotlight, this week is the 20th Congress of the Chinese Communist Party, which is expected to determine government policy for the next five years.

S&P 500 (F) (US500) 3,612.39 −27.27 (−0.75%)

Dow Jones (US30) 29,202.88 −93.91 (−0.32%)

DAX (DE40) 12,272.94 −0.060 (−0.01%)

FTSE 100 (UK100) 6,959.31 −31.78 (−0.45%)

USD Index 112.75 +0.49 (+0.44%)

Important events for today:
  • – Australia NAB Business Confidence (m/m) at 03:30 (GMT+3);
  • – UK Average Earnings Index (m/m) at 09:00 (GMT+3);
  • – UK Claimant Count Change (m/m) at 09:00 (GMT+3);
  • – UK Unemployment Rate (m/m) at 09:00 (GMT+3);
  • – US FOMC member Mester Speaks at 19:00 (GMT+3);
  • – Switzerland SNB Chairman Jordan Speaks at 19:45 (GMT+3);
  • – UK BoE Gov Bailey Speaks at 21:35 (GMT+3).

By JustForex

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Economics & Fundamentals Financial News
← Previous Page
Next Page →