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Wall Street stumbled mid-Friday on Russia-Finland geopolitical tension and MonkeyPox virus outbreak concern. Dow Future was already under stress on the concern of synchronized global stagflation amid lingering geopolitical tensions & economic sanctions on Russia, which is causing hotter inflation and faster/bigger Fed tightening. Dow Future made a low around 30959.00 Thursday, but recovered over 500 points and made a high 31521.00 early U.S. session Friday on Chinese rate cuts.
On early Asian Friday, China’s PBOC held a 1-year LPR but cut its main mortgage reference interest rate by the most on record since the rate was introduced in 2019, as Chinese policymakers tries to reduce the economic impact of zero COVID lockdowns and a severe slowdown in the real estate sector. The PBOC held steady its key rates (1Y LPR) for corporate and household loans at May fixing, but slashed the mortgage reference rate for the second time this year, amid a slowdown in the Chinese economy due to Omicron spikes, real estate crisis, and the weak loan demand. The 1Y LPR was kept unchanged at 3.7% after cuts of -0.05% and -0.10% in December and January, while the 5Y LPR was trimmed by -0.15%, the most since a revamp of the rate in 2019, to 4.45%.
Recently, Chinese financial authorities allowed commercial banks to reduce the lower limit of interest rates on home loans by -0.20%, based on the corresponding tenor of benchmark LPRs for buying first homes. The Chinese loan guidance came after the PBOC data shows new bank credits in China plunged to their lowest in more than four years in April. During the first quarter, banks in many cities in China have cut mortgage rates after calls from authorities to support buyer sentiment.
The PBOC rate cut was long overdue for China's property market which has experienced 8 straight months of home-price reductions with developers under extreme pressure. Chinese rate cuts and hopes of further targeted stimulus coupled with optimism about Shanghai reopening and gradual exit strategy from zero COVID policy lockdown boosted Asian as well as European and US futures early Friday.
But Wall Street Futures were also under stress despite Chinese rate cuts amid gamma option expiry related vitality as $460B worth of derivatives across single stocks and $855B of SPX- 500-linked contracts were set to expire Friday. And Dow Future stumbled almost -1000 points from the session high, made a low around 31587.00 after a report that the WHO is convening a group of leading experts for an emergency meeting about the ongoing MonkeyPox outbreak as 12 countries have reported recent cases, with the U.S. CDC confirming at least one in the U.S.
Although, at this stage, MonkeyPox spread is not a major concern in Europe, as per some virologists, the virus is spreading through physical touch, and it can also spread through respiratory droplets under certain circumstances. This may be creating some panic as it could potentially mutate into a more lethal transmissible form in humans. Health officials say that the existing smallpox vaccine should offer at least some protection against MonkeyPox, and they are already considering giving it to certain vulnerable/frontline groups. As with any viral infections, MonkeyPox patients usually need only supportive care, there is also a possible therapeutic medicine is available-Tecovirimat which was developed to treat smallpox but may likely work for MonkeyPox too. As per the report, the smallpox vaccine may also work to prevent MonkeyPox, but it seems that a MonkeyPox vaccine already exists as well.
The report said the U.S. has ordered 13M additional doses of the MonkeyPox vaccine (Jynneos jabs) after a Massachusetts man contracted the rare but potentially severe virus. This vaccine can be used to treat both MonkeyPox and smallpox — was created by the biotechnology company Bavarian Nordic.
In any way, on Friday, France, Germany, Austria and Belgium reported their first cases of MonkeyPox, joining a growing number of other European and North American nations. In the last week, Britain, Spain, Portugal, Italy, U.S., Sweden and Canada all reported MonkeyPox infections, mostly in young men who hadn’t previously traveled to Africa, the genesis of the virus.
As per healthcare experts, MonkeyPox typically causes fever, chills, a rash, and lesions on the face or genitals. WHO estimates the disease is fatal for about 1 in 10 people. On Friday, Britain’s Health Security Agency reported 11 new MonkeyPox cases, saying that “a notable proportion” of the most recent infections in the U.K. and Europe have been in young men with no history of travel to Africa who was gay, bisexual, or had sex with men (like Ebola).
In Germany, Health Minister Karl Lauterbach said the government was confident the MonkeyPox outbreak could be contained. He said the virus was being sequenced to see if any genetic changes might have made it more infectious. Experts said that while it’s possible the outbreak’s first patient caught the disease while in Africa, what’s happening now is exceptional. Experts also pointed out that the suspension of smallpox vaccination campaigns after the disease was eradicated in the 1980s might inadvertently be helping MonkeyPox spread. Smallpox vaccines also protect against MonkeyPox, but the mass immunization campaign was stopped decades ago in developed countries. But in developing countries like India, smallpox vaccination still exists under the standard universal vaccination campaign.
· I don't see anything stopping getting unemployment below 3% by the year-end
· The economy may slow but will still be above-trend in 2022
· I don't see stagflation as a scenario
· We have to get inflation under control, we have a good plan to do so
· Market repricing is partly due to the Fed and partly due to prices (inflation) before the downturn
· 50 bps is a good plan for now (When asked if 75 basis point hikes would be necessary at some point to curb soaring inflation)
· I think as always we have to pay attention to incoming data on the economy and inflation and we’ll do that going forward
· I’ve also said we should try to get to 3.5% by the end of this year, which is higher than some of my colleagues, but I think it would help us
· The more we can front load and the more we can get inflation and inflation expectations under control, the better off
· We could be lowering the policy rates in 2023 or 2024 because we got inflation under control
· I expect the unemployment rate to continue to tick down
· I'll leave the timing and management of rates to Chair Powell
· We want to see the central part of the price-change distribution come down
· I see 2022 GDP growth at 2.5% to 3% even with the negative Q1
· I don't see a recession this year or next year, it is not my base case
· All central banks globally pursuing QT policy
· Quantitative tightening is an important part of the policy
· Disinflationary dynamic to come through product markets
· Some businesses are going to get punched in the face as consumers substitute basic necessities for luxuries
· Recessions would have to come because there’s some really large shock and I can’t rule out that there would be some really big shock. Maybe there would be, but I am not seeing it near-term
· I see a pretty good second half of the year amid the second reopening going on where people are getting used to the endemic phase of the pandemic; people want to be out and about and that’s going to lead to strong consumption this year
· I think you would expect with the Fed raising rates that all these assets, trillions of dollars worldwide, would have to be repriced, but we have to get inflation under control and I think we have a good plan to do so
· Inflation is very tough on low and moderate-income households and renters right now. They are sitting in their apartments and their rent is going up dramatically and they’re worse off. They have to decide where they are going to save money and they are trading down the kinds of things that they would buy, they’re cutting out some things altogether. Businesses have to be cognizant of this or they are going to lose market share
· A lot of CEOs believe they have lots of pricing power and can do what they want to make a lot of money, but some of those executives are going to get punched in the face here with the fact that consumers have to react. They only have so many dollars coming in the front door and they have to decide what they are going to buy with those dollars
On Friday, the St Louis Fed President Bullard almost acknowledged that the U.S. may face a recession in the coming days and Fed has to cut rates again in late 2023 or early 2024. Bullard as well as Powell and other Fed policymakers and Biden/White House officials are also emphasizing that hotter inflation adversely affects low/mid-income groups, which is the main voter box for any political party. The dual combination of Bidenflation and Putinflation may cause synchronized global stagflation or even an outright recession by late 2023. This may result in the launch of QE-5 by the Fed in early 2024 (ahead of Nov’24 U.S. Presidential election) along with another dose of fiscal stimulus by Biden (revised BBB package).
There are already signs that U.S. economic growth is faltering, but at the same time, a huge Ukraine fiscal stimulus may also help the U.S. economy (in terms of military equipment production and other grants). Apart from the benefit of the U.S. military industry, U.S. oil & gas industry is also a big beneficiary of elevated prices of oil & gas amid the lingering proxy war between Russia-U.S./NATO over Ukraine and NATO expansion policy in Eastern Europe (Russian border states/countries). Europe is the biggest loser of the U.S. proxy war with Russia as Europe imports around 70% of its oil requirement and is heavily dependent on Russian oil & gas supplies.
Putin is leveraging the Russian supply of oil & gas and certain other commodities including food items for his war on Ukraine. Putin is expecting that the West (Europe and the U.S.) will give him concessions over Ukraine issues as hotter inflation will invite recession and political unrest there. Now the question is whether Biden will blink and give concession to Putin for an amicable solution over Ukraine to bring inflation down ahead of Nov’22 mid-term election. Biden’s approval rate is plummeting because of elevated Bidenflation even before the Russian invasion of Ukraine and subsequent Putinflation.
The market was also concerned about eventual Russian action on Finland for NATO membership application. On Thursday, Russia warned Finland of an appropriate military response for its NATO membership application. On Friday, Russia’s Defense Ministry has for the first time revealed details regarding its threatened ‘military and technical’ response two days after Finland and Sweden submitted their applications for NATO membership.
The Russian Defense Minister Gen. Sergei Shoigu described in public statements that Russia's military is beefing up its troop presence along its western borders, though without specifying which exact locations. Finland shares an over 800-mile border with Russia. Shoigu outlined that 12 new units will be established under the Western Military District for new border patrols, including heavy military equipment.
Shoigu further indicated that both military drills and naval maneuvers in the Baltics will increase in response to attempts to expand NATO. On Friday, Shoigu said: “We are taking adequate countermeasures. Under these conditions, we are actively improving the combat composition of the troops. By the end of the year, 12 military units and subunits will be formed in the Western Military District. This may include long-range missiles or other heavy equipment--the ongoing organizational measures are synchronized with the supply of modern weapons.”
Early this week, Russian foreign minister Lavrov tried to downplay Finland and Sweden's NATO application. But he and other top Kremlin officials, including President Putin have stressed that a ‘response’ would definitely come. Lavrov said Wednesday: "Finland and Sweden, as well as other neutral countries, have been participating in NATO military exercises for many years. NATO takes its territory into account when planning military advances to the East. So in this sense, there is probably not much difference. Let's see how their territory is used in practice in the North Atlantic alliance.”
Kremlin said Sweden and Finland join NATO; it would move nuclear weapons closer to the two countries: "There can be no more talk of any nuclear-free status for the Baltic region--President Putin had already ordered the military to boost its forces opposite Europe.”
On Friday, Wall Street (equities) crumbled on MonkeyPox epidemic concern coupled with the Russian military plan for Finland. But eventually, Dow Future also recovered over +600 points from the panic low and closed around 31200 levels as Fed’s Bullard, an influential FOMC official, virtually indicated the inevitable launch of QE-5 by late 2023. Gold also surged on Russian tension and hopes for QE-5.
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