Is peak inflation behind us?

You have probably heard the phrase buy the rumor sell the news. Well, the rumor for a while now has been inflation, and the news is that we are seeing very strong inflationary pressures. At least that is what many pundits say. So far however, the market is not selling the inflation news.

Markets as we know are forward looking mechanisms, and mostly do not price what is happening today but what might happen in the future. Now, the Fed’s favorite inflation metric is the PCE, or Personal Consumption Expenditures Index. As the chart below depicts, PCE probably peeked some while ago.

Coupled with the fact that 10- year yields also peeked several months ago (chart below), the Fed might be right in shrugging off the inflation talk, and calling inflationary pressures transitory.

Now I am not smart enough to be able to predict if inflation is transitory, if the Fed is right, or if those who worry about inflation are right. However, the market seems not to worry, and we do have indications that inflation may have peeked several months ago.

If this proves to be correct, then the market is correct in not panicking, and the Fed will also be proved correct with its transitory theory. Either way, if we assume the market is the be the best indicator of what is going on – in the sense that we are not seeing panic selling because of inflation fears – then chances are that inflation, is not a risk to the market overall.

What is the “Delta” virus variant that scares investors

Global financial markets have seen some nervous volatility at the start of the week on growing concerns the re-imposition of covid-led lockdowns at some parts in Southern Asia and Pacific region could damage the global economic recovery after the pandemic.


Economic consequences of “Delta” variant:

Market’s risk appetite has lost some steam recently after the highly infectious coronavirus variant called “Delta” has spread around the world, despite the progress of the vaccinations in the developing countries.

Investors worry about the economic consequences of the new covid outbreak at a time central banks and governments have already shown some signs to limit their “accommodative” monetary and fiscal pandemic-relief stimulus in the years ahead.

On a global level, economic consequences might be limited due to the successful vaccination campaigns together with the ongoing government income, liquidity, and fiscal support.

However, at a regional level, some countries particularly in Southern Asia that have fallen behind vaccination programs; might be facing some economic backdrop, since the resumed lockdowns might have a very large and immediate negative impact on consumer spending and business activity.

Furthermore, some countries in the Mediterranean Sea that depend on tourist travellers from Britain might also face problems ahead of the summer season. 


What is the “Delta” virus variant:

The “Delta” virus variant is the most closely-watched coronavirus mutation right now since it’s around 60% more transmissible than the “Alpha” variant first found in Britain, increasing the risk of hospitalization, and reducing the efficacy of vaccines.

The WHO-World Health Organization warned that “Delta” is the fastest and fittest coronavirus strain yet, and it will “pick off” the most vulnerable people, especially in places with low Covid-19 vaccination rates.

The “Delta” variant was firstly reported in India a few months ago, and it was the dominant strain responsible for more than 20 million infections and 360,000+ deaths in the country.


“Delta” strain in Europe:

The “Delta” variant is now spreading in Europe and especially in Britain, Germany, and France, while EU health officials warned it could present 90% of the bloc’s cases in late August.

The variant is already dominant in Britain, where it accounts for 95% of new cases. However, hospitalizations and deaths have remained low in the country, which has vaccinated more than 80% of the adult population with at least one dose.

The spread in Britain has led many countries to ban all flights from the country, designating it an “extremely high-risk” destination. Spain, Portugal, France, and Germany have imposed travel restrictions on unvaccinated British travellers to stop the spread of the variant.

Hence, the variant accounted for 36% of cases recorded in Germany in the week to June 20, up from 15% the previous week, and is likely to increases further in the coming weeks.

Identical happenings in France as well, with Health Minister saying the “Delta” variant accounted for around 20% of the cases, up from 10% the previous week, while a rise of infections has reported in Israel, Turkey, Greece, Cyprus, Poland, and Russia caused by “Delta” variant.


Fresh lockdowns in the Asia-Pacific region:

Australia has already imposed fresh social restrictions to fight the “Delta” variant of the virus since last week. The government forced lockdowns in three major cities including Sydney couple with some form of curbs in several other cities, affecting about 80% of the country’s population.

Indonesia is also facing record-high cases, with the Red Cross stating that the country’s virus surge is taking it to the edge of a “catastrophe”.

Same picture in Malaysia and Thailand that have announced new restrictions, while virus outbreaks have disrupted shipping at some Chinese ports.


Positive news for Moderna’s vaccine:

Market participants have eased some their worries after Moderna Inc. announced yesterday that its vaccine produced protective antibodies against several variants, including the Delta variant.

The tests involved blood samples taken from eight test subjects one week after the second vaccination dose. The claims have not been reviewed by other scientists.

Global markets post strong H1 gains ahead of a rocky H2, 2021

Massive pandemic-relief fiscal spending, the progress with vaccination programs, and the low-interest rate environment have been boosting financial assets around the world, despite the recent spike in inflation and commodities prices.

Global stock markets have performed very strongly in the first half of 2021, with the S&P 500 index soaring more than 40% so far and almost 100% since March 2020 lows, led by gains in value and cyclical stocks.

However, as financial markets post fresh record highs, new market risks are arising ahead of the second half of the year, which could hurt the market’s risk appetite.

Investors are concerned about the rapid spread of the highly contagious Delta coronavirus variant, which has been responsible for the rise in cases in Asia, Britain and Europe. 

Sydney, Australia’s most densely populated city, fell into a fresh lockdown, while some new restrictions have been announced in Indonesia, Malaysia and Thailand last week.

Market participants are also concerned about when and how the central banks will begin tapering their accommodative monetary policies, given the lofty asset valuations which heavily rely on cheap liquidity.

The Federal Reserve has already raised its inflation expectations and has indicated two interest rate hikes for 2023 as the US economy recovers faster than expected from the pandemic-induced recession.  

Fed still supportive, but caution is warranted

The Fed last week basically told us what most of us suspected.

First, the Fed was optimistic about economic growth, while anticipating higher inflation, while stressing that COVID is still a risk.

The Fed will continue to purchase $120B of assets each month until, and I quote, “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. At the same time, is has not given the market when tapering will begin.

The Fed is also insisting higher inflation is transitory and is mostly due to supply chain “bottlenecks”.

Finally, the Fed shed some light on when it might raise interest rates or takeoff. This expectation is now set towards the end of 2023.

Overall, the bond market does not seem to worry about inflation, siding with the Central Bank. Please note it now seems yields peeked several months ago.

Also note that even assuming rates do rise towards the end of 2023, that is a very long way in the future to be able to position any portfolio. However, it might be a headwind.

The dollar initially rallied, but it has since given back most of its gains. As a sidenote, I personally do not consider the Fed statements dollar positive.

Overall, the Fed is still very accommodative, and does not want to surprise markets, giving a heads up of its intention’s way in advance. This is very market positive, because it provides participants time to digest and price everything in advance.

The bottom line is that the Fed continues to be supportive of both the economy and markets, but please note that now we have two headwinds. First at some point the markets will be concerned about interest rates if they rise, and second, inflation concerns are on everyone’s mind. If we add to these the valuation landscape, investors need to be extra cautious looking ahead.

Bitcoin recovers after dropping to $29,000 as China’s crackdown deepens

The cryptocurrency market hit hard on Tuesday, extending the weekend’s losses by more than 10%, after the Chinese government intensified harder the crackdown on crypto mining operations in the country, while it also instructed local financial institutions to avoid cryptocurrency businesses.

China’s crackdown deepens:

Everything started last month when China’s State Council announced its plans for harder restrictions on crypto miners for environmental reasons as well as on traders of cryptocurrencies.

The PBOC-People’s Bank of China advised the largest banks and payment firms to crack down harder on cryptocurrency trading, the latest tightening of restrictions on the sector by authorities.

Following the PBOC announcement, retail banks including Agricultural Bank of China and Ant Group’s payment platform Alipay said they would step up monitoring to root out crypto transactions.

Hash rate collapses:

Market participants were shocked by the further crypto crackdown in China since the country hosts more than 60% of the world’s crypto miners.

Many bitcoin miners were shuttered during the weekend after Chinese authorities ordered a halt to crypto mining, shutting down more than 90% of the country’s bitcoin mining capacity.

As a result, the “hash rate” of the bitcoin network – a measure of its processing power that shows how much mining is taking place, on Monday hit its lowest level since late 2020, especially in major bitcoin mining hubs including Sichuan, Xinjiang, and Inner Mongolia.

Market reaction:

The price of the world’s most valuable digital currency dropped to as low as $28,600 on Tuesday, falling below key support level of $30,000 for the first time since early January 2021.

Bitcoin fell 10% yesterday turning negative for the year at one point, before rebounding at the current level of $34,000 amid “bottom-fishing” buying orders.

BTC/USD, 4-hour chart

Ethereum, the second-largest crypto on market capitalization had also experienced a fierce sell-off, dropping to as low as $1,700 before regaining the key psychological level of $2,000.

Other smaller digital currencies have hit harder, losing more than 20% of their value, with the popular-parody Dogecoin dropping below $0,20, Cardano falling below $1, and Litecoin dropping as low as $105 before bouncing higher.

While the crypto market recovered a bit from yesterday’s sell-off, it remains down by more than 50% from its all-time highs reached a few weeks ago driven by strong demand from institutional investors and speculators.

The total crypto market capitalization dropped from a record high of $2,5 billion to less than $1,3 billion yesterday, mostly affected by the devaluation of the two largest digital currencies, Bitcoin and Ethereum.

Brent oil breaks above $75/b on strong post-pandemic demand and tight supplies

Brent, the benchmark for international crude oil prices keeps up its rally above $75/barrel level, while the US-based WTI crude rises above $73/barrel, both boosted by tight supplies and a quicker than expected recovery in crude oil demand growth as global economies reopen after the pandemic.

Brent crude contract, Daily chart


Robust oil demand recovery after pandemic:

The price of the Brent contract passed above $75/b on Wednesday morning for the first time since April 2019 on signs of raising post-pandemic demand for petroleum products in key fuel consumer markets such as the USA, Europe, and Asia.

The demand growth for jet fuels and gasoline is expected to be higher this summer amid the resuming air and road travelling as pandemic-led restrictions ease and more people vaccinated.


Tight supplies and delayed Iranian nuclear deal boost oil prices:

Crude oil prices reacted positively on news over a pause in talks to end U.S. sanctions on Iranian crude. According to Iranian delegates, the talks which take place in Vienna with the US and other world powers to restore the 2015 nuclear deal could be delayed beyond summer/

In another positive sign, the API-American Petroleum Institute reported a much bigger drawdown of 7.2 million barrels for the week ended Jun. 18 vs an expected 3.6 million barrels draw last night.

Energy analysts are looking ahead for the inventory report from the US EIA-Energy Information Administration expected later in the day, to reconfirm the tightening supply-demand balance which supports the oil rally.


Rising US dollar weighs on oil prices:

Both crude oil contracts managed to recover most of the last week’s losses as the US dollar jumped to a 2-months high on the prospects of interest rate hikes from the Federal Reserve, starting from 2023.

A stronger US dollar makes dollar-denominated crude oil contracts more expensive for buyers with foreign currencies, reducing demand for refined products such as gasoline and diesel.

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