Olivia

Stagflation is coming – and it could make the 1970s look like a walk in the park. As you’ve probably noticed, I expect a recession next year, and I’m not alone, as this has become the baseline scenario for many financial institutions and analysts. Even the DSGE model used by the New York Fed shows an 80% probability of a hard landing (defined as four-quarter GDP growth dipping below -1%) over the next ten quarters. Reasons? Inflation and the Fed’s tightening cycle. The history is clear: whenever inflation has been above 5%, the Fed’s hikes in interest rates have always resulted in an economic downturn. The key yield curve has recently inverted, which means that the most reliable recessionary indicator has started to flash red light. Although the coming recession could decrease the rate of inflation more than I assume, given the slowdown in money supply growth, I believe that high inflation (although lower compared to the current level) will continue through 2023 and perhaps also in 2024 due to the excess increase in money supply during the pandemic. It means that recession is likely to be accompanied by high inflation, forming a powerful yet negative combo, namely, stagflation. If… Read More »Stagflation: The worse for US, the better for gold

EUR/USD struggles to capitalize on the previous day’s positive move beyond the 1.0300 mark. China’s COVID-19 woes lend support to the USD and cap the major ahead of FOMC minutes. Traders will also look to Wednesday’s release of the flash PMIs from the Eurozone and the US. The EUR/USD pair regained positive traction on Tuesday and climbed back above the 1.0300 mark, stalling the pullback from a four-and-half-month top. The US Dollar came under some renewed selling pressure and eroded a major part of the previous day’s strong gains to over a one-week high. This, in turn, was seen as a key factor acting as a tailwind for the major. Despite hawkish comments by several Fed officials, investors seem convinced that the US central bank will slow the pace of its rate-hiking cycle. In fact, the current market pricing indicates a greater chance of a relatively smaller 50 bps lift-off at the next FOMC policy meeting in December. The bets were reaffirmed by Cleveland Fed President Loretta Mester, saying that it makes sense to slow down the pace of rate increases. This led to a further decline in the US Treasury bond yields, which, along with the risk-on impulse, weighed… Read More »EUR/USD Outlook: Bulls seem non-committed ahead of Eurozone/US PMIs, FOMC minutes

Minutes from the latest Federal Reserve meeting may shed emphasis on the dovish tilt in the text. The document is revised before the release, considering the weak inflation report. Markets have tended to see the glass half-full in recent weeks – and that is unlikely to change. “Turning our back to forward guidance” – those following central banks closely will have noticed that this catchphrase belongs to the European Central Bank, not the Federal Reserve. The Washington-based institution does guide markets, and this is one of the reasons to expect the US Dollar to fall in response to the market-moving FOMC Meeting Minutes. I will run through three reasons to expect markets to cheer and the Greenback to glide lower in response. 1) Dovish tilt in the statement The Federal Open Market Committee (FOMC) deliberates every word in its statement, and these words caught markets’ attention at the time of the last FOMC on November 2 (emphasis mine): …the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation… What do these changes signal? The Fed acknowledged in its statement that It had already raised rates significantly and that… Read More »FOMC Meeting Minutes Preview: Three reasons to expect a US Dollar downer

The OECD warning that the UK faces years of stagnant growth has done little to dampen sentiment for the FTSE 100, with energy stocks leading the push higher. FTSE 100 leads the gains despite OECD growth  concerns “European markets have provided an area of optimism today, with equities outperforming their US counterparts despite growth concerns raised by the OECD. Quite how much markets are listening to the OECD is questionable, with both the FTSE 100 and pound gaining ground despite claims that we will see a measly 0.2% 2024 after next year’s contraction. While the effects of Brexit have been largely masked by the Covid pandemic, the outlook remains bleak over our ability to grow our way out of this current crisis. Nonetheless, with the Bank of England likely to take a more accommodative stance once inflation is brought under control, the ability to predict when the UK returns to health will be reliant on driving down prices. Unfortunately, the OECD predict that the UK energy price cap will serve to lift inflation, thus limiting the ability to combat the stagflation that is expected to dominate 2023. “ Saudi comments help drive energy outperformance “Energy stocks have managed to push… Read More »Energy leads the push higher as the FTSE 100 ignores OECD warning

Outlook: This week is a short one in the US because Thanksgiving comes on Thursday and while markets are open on Friday, lots of folks make it a 4-day weekend–trading will be thin in every class. Somewhat strangely, the news of the week may well be the minutes of the last FOMC meeting on Wednesday, since we are all trying to read the Fed’s mind. We guess the minutes will show a relentlessly hawkish tone. You have to wonder if the markets will “get it” at last. We also get the S&P flash manufacturing and services PMI’s, durables, the Riksbank, the Reserve Bank of New Zealand, and the minutes of the last ECB policy meeting. The S&P composite PMI is forecast down a hair to 48.0 from 48.2 in Oct, led by manufacturing (50.0 from 50.4) with services at 48.0 from 47.8. We also get a slew of regional Fed reports, starting with the Chicago national today, expected down to -0.03 from 0.10 in September. Remember that in this measure, zero means “on trend,” so despite being the first negative reading since June, it’s not actually “bad” but rather a sign of ongoing resilience. About the Fed: The bond gang got… Read More »Renewed crackdowns in China raise the probability of recession everywhere

As we start a new week in the UK, the focus is on the renewed Brexit debate, which has resurfaced after some assumed it was put to bed at the end of 2020. The Sunday Times ran a story that said senior government figures were mulling over putting Britain on the path towards a Swiss style relationship with the EU. In effect this would mean frictionless trade, but it would come with a price: free movement and contributions to the EU budget. However, those claims have been rebuffed by PM Rishi Sunak on Monday, he told the CBI conference that he would not support a realignment with EU trade rules although he would be looking for closer ties with the EU. The Brexit debate has resurfaced at an interesting time for the UK. The latest YouGov polls suggest that the wider British public now think that Britain was wrong to leave the European Union by 56% to 32%, and one fifth of Brexit voters now think that they made the wrong decision. The ERG was outraged by the headlines on Sunday and vowed to bring down the government if they planned on following a Swiss-style relationship with the EU. However,… Read More »The week ahead: Brexit debates, PMIs and yield watch

EURUSD remains under some selling for the third successive day and drops to a one-week low. China’s COVID-19 woes, geopolitical risks drive haven flow towards the USD and exert pressure. Talks for a more aggressive policy tightening by the ECB could limit deeper losses for the Euro. The EURUSD pair extends last week's retracement slide from a four-and-half-month high and edges lower for the third successive day on Monday. The downtick drags spot prices to a one-week low during the Asian session and is sponsored by some follow-through buying around the US Dollar. The market sentiment remains fragile amid the worsening COVID-19 situation in China and the imposition of fresh lockdowns in several financial hubs – including the capital Beijing and the economic centre Shanghai. Adding to this, fears of a potential escalation in the Russia-Ukraine conflict temper investors' appetite for riskier assets and drives some haven flows towards the safe-haven greenback. This comes on the back of hawkish signals from several Federal Reserve officials last week, which is seen as another factor offering additional support to the buck. Moreover, the better-than-expected US Retail Sales data released on Thursday cast doubts on the peak inflation narrative and suggested that the… Read More »EURUSD Analysis: Bulls seem to lose the grip amid reviving demand for the safe-haven USD

Next week (November 23), the first flash estimate of Eurozone PMI data for November will be published. In October, manufacturing sentiment in particular deteriorated significantly, suggesting a decline in manufacturing activity in the current fourth quarter. By contrast, sentiment among service companies cooled only slightly. However, the index also suggests a slight decline in activity among service providers in 4Q. For November, we expect a further slight weakening of business sentiment in the Eurozone. A stabilization of European gas prices, at a low level compared to the summer months, is currently a welcome signal, especially for industry. Overall, however, the economic environment remains highly uncertain. The EU’s monthly indicator for economic uncertainty rose slightly again in October and is gradually approaching the highs recorded at the outbreak of the Covid-pandemic in March 2020. Companies are therefore currently acting with corresponding caution and restraint in their personnel planning and investments. At least the capital market gave positive signals from an economic perspective last week. For the first time in a long time, inflation data in the US was significantly lower than expected by the market, which supported risky asset classes, especially equities. In addition, a meeting between China’s President Xi and… Read More »Uncertainty for the growth outlook remains high

Europe It looks set to be another positive week for markets in Europe, however most of this week’s price action has been confined to a fairly modest range in what looks increasingly like a period of consolidation. The FTSE100 had yet another look above the 7,400 level and once again was unable to sustain the momentum. Amongst the gainers today, retail has done well, with Frasers Group higher after being rated as a buy by Numis, while JD Sports has got a lift after US counterpart Foot Locker upgraded its outlook for the year after beating on Q3 results. Legal & General is higher after reiterating its full year guidance while welcoming the announcement from the Chancellor of the Exchequer to overhaul Solvency II with a view to making it easier for domestic insurers to invest in home grown infrastructure projects. The insurer also stated it has taken a limited hit due to the recent LDI volatility on the UK gilt market, estimating an impact of about £10m. Royal Mail owner International Distribution Services was on the receiving end of more bad news today as the CWU union announced further strike days in the lead-up to Christmas, although the shares still managed to… Read More »European markets drift higher as US Dollar consolidates at key levels

History tends to repeat itself, and mining stocks appear to be repeating their 2008 performance, which has very interesting implications. Why do I think that gold miners are repeating their 2008 price patterns? Please take a look at the below chart. The only times when gold stocks declined similarly sharply as they did this year were in 2013 and in 2008. Given that the situation in stocks appears to be similar to what we saw in 2008 (due to rising interest rates, for example), it seems that focusing on this analogy is particularly important right now. All right, let’s zoom in and see how mining stocks declined in 2008. Back then, the GDXJ ETF was not yet trading, so I’m using the GDX ETF as a short-term proxy here. The decline took about 3 months, and it erased about 70% of the miners’ value. The biggest part of the decline happened in the final month, though. However, the most intriguing aspect of that decline – which may also be very useful this time – is that there were five very short-term declines that took the GDX down by about 30%. I marked those declines with red rectangles. After that, a… Read More »Can a rally in Gold stocks really be bearish?