Financial Markets’ Weekly Recap, September 19-23

Capital controls and currency intervention will be among tools emerging Asians can use if rapid US interest rate hikes and the surging dollar force the risk of falling in a debt crisis. So, it is appropriate and helpful to compose the comprehensive picture of financial assets’ performance, last week from the news headline-mosaic across the world map from China westwards.

Asia

Asia-Pacific shares fell on Friday as investors were digesting the Fed’s hawkishness. Hong Kong’s Hang Seng index lost 1.18% in the final hour of trade. The Shanghai Composite retreated 0.66% to 3,088.25 and the Shenzhen Component losing 0.972% to 11,006.41. In Australia, S&P/ASX 200 fell to lowest level since July on return to trading after Thursday’s holiday, then recovered some losses to close 1.87% down at 6,574.70. South Korea’s Kospi dipped 1.81% to 2,290.

China’s Yuan

On Friday, China’s yuan extended losses nearest the lows coinciding with the shock currency devaluation in 2015. The yuan retreated to 7.1280 per dollar, 1.94% weaker than the central bank’s daily reference rate of 6.9920 on Friday.

From a political viewpoint, President Xi Jinping practically has nothing to gain from doing anything that risks adding any drama to Chinese financial markets, but the overmastering US dollar threatens to break China’s grip on the yuan.

Property Bubble

The crisis at Evergrande has spread through the industry forcing the government to pledge this week of 200bn yuan to jumpstart investment, but the move is seen as insufficient to cover all what is needed. S&P rating agency said at least 800bn yuan is needed to rescue the property market amid deteriorating prices, retreating sales, broken developers and buyers who launched unprecedented mortgage boycott.

Japan’s Intervention

There are growing doubts about the capability of Japan’s intervention to fix the yen’s latest weakness, though the Japanese yen soared across the board on Thursday after BoJ kept silent, but the Ministry of Finance intervened in the foreign exchange market to boost the battered currency for the first time in 24 years, since 1998. But, the chances of a sustained rebound in the yen are limited.

On Thursday, the USD/JPY traded in a stunning 550-point range, as the yen fell sharply before reversing directions and closing the day up over 1 per cent. Things have calmed down on Friday and the pair traded quietly at 142.37.

Europe, The West Threatened

If Russia’s Putin acts on his latest nuclear threats, Europe ponders to an ascend the scale of carefully calibrated response, based on how far Russia goes. Political declarations are easy, but it is unclear what type of measures can be agreed upon, as the financial punishments against Russia are also increasingly inflicting pain on European economies.

The international manufacturing purchasing managers’ index for the euro area, issued by Standard and Poor’s, fell to 48.5 points from 49.6 points, which indicates levels below market expectations, which indicated 48.7 points.

EUR/USD

Russia’s warning of using nuclear weapons if needed to battle with the West and the G7 efforts to gather courage against Moscow also weighed on the risk appetite and drowned the EUR/USD prices. The pair slumped the most in eight days on Friday while refreshing the multi-year low with the 0.9667 number. The latest corrective bounce, however, appears tepid ahead of the key catalysts.

Strong US PMIs figures account for the Euro’s retreat in addition to the negative activity data from the EU, plus Russia’s ferocious warning to the West and the Group of Seven (G7) leaders’ readiness to counter Moscow with sanctions, so, all these factors led to the EUR/USD pair’s weakness the previous week.

The first readings of September month S&P Global PMIs suggested that the European economy slipped further into contraction, hurt by soaring energy prices. German Services PMI dropped to the two-year low while its counterpart for Europe tested the lowest levels in 19 months. Further, Manufacturing PMIs slumped to the lowest in 20 months.
The International Services Purchasing Managers’ Index for the Eurozone, issued by Standard & Poor’s, fell to 48.9 points, compared to the previous reading of 49.8 points.

Italy Electing Government

Sunday’s elections do suggest an end to the political uncertainty, even if there prevails a little comfort for the right-wing leadership in Italy among some of the European nations, including Germany.

The latest polls on Italy’s elections mention that the right-wing alliance led by Giorgia Meloni’s Brothers of Italy party looked set for a clear majority in the next parliament, reported Reuters. Ahead of the elections, Germany’s governing Social Democratic party warned last week that her win would be bad for European cooperation. Lars Klingbeil, the chairman of Chancellor Olaf Scholz’s SPD, said Meloni had aligned herself with “anti-democratic” figures such as Hungary’s prime minister, Viktor Orbán.

The British Pound’s Ordeal

The GBP/USD collapsed on Friday from 1.1200, eyeing a break below the 1.1000 figure, which was last recorded in March 1985 on depressing market sentiment, incited by worldwide central bank tightening to fight price pressures. The GBP/USD traded at 1.0965, below its opening price by more than 2%, after hitting a daily high of 1.1273.

UK Finance Minister Kwasi Kwarteng’s signals of more tax cuts were looked upon as “not helping much”. Kwarteng refrained from pushing the Bank of England towards defending the pound and exerted downside pressure on the GBP/USD prices.

on Friday, the pound’s selloff followed the release of the government’s ‘Growth Plan’– a budget in all but name and the biggest tax reductions in 50 years. The plan showed few signs of tightening as markets entered a new week, heaping pressure on Prime Minister Liz Truss’s days-old cabinet. The BOE’s intervention seems looming to trim the pound’s losses.

Risk-aversion and the pessimism surround the UK economy, mainly due to the Russia-Ukraine concerns and the BOE’s late response to the jump in inflation, so, these factors together could keep the GBP under pressure. Fears of the BOE intervention may restrict GBP/USD moves.

Turkey, Sweden

The Riksbank in Sweden surprised market participants Wednesday by hiking its benchmark rate 100 basis points hoping to attract investors to the bond market and strengthen the krona. Instead, the opposite occurred, as the dollar surged 3.5% into the end of the week.

Turkey’s Central Bank cut its benchmark rate by 100 basis points on Wednesday. The Turkish lira (TRY=X) sunk and ended the week on par with the Argentine peso (ARS=X) as the worst-performing currencies of the year. The dollar is up about 40% against both.

United States

Last Wednesday, the Fed raised the interest rate by 75 points to 3.25%, in line with market expectations and the highest pace by the Fed since early 2008. Market estimates suggested that the central bank may raise interest rates to 4.4% at the end of 2022. Other central banks are struggling to keep up with the Fed.

“We are committed to using our tools”, Fed Chair Jerome Powell said on Friday. Fed Vice Chair Lael Brainard mentioned that inflation is very high and is hitting low-income families ‘hard’. During the weekend, Atlanta Fed’s Raphael Bostic told CBS’ “Face the Nation” that he still believes the central bank can tame inflation without substantial job losses given the economy’s continued momentum.

Wall Street’s fear gauge (CBOE Volatility Index) on Friday jumped above 30, its highest point since late June but below the 37 average level. US stocks closed in the red territory and US Treasury yields climbed while the US Dollar Index refreshed the multi-year top. S&P 500 Futures print mild losses while the US 10-year Treasury yields add four basis points to 3.74% at the latest.

Global S&P PMIs released in the EU, UK, and the US triggered anew investors’ recession fears, increasing appetite for the US dollar which enjoys the safe-haven status, with the US Dollar Index sitting at 112.990, up by 1.55%, after hitting the YTD high at 113.228.

Gold

In a strong dollar world, gold often has to suffer. Gold has been stuck last week with any attempted break higher met with more forceful opposition. Gold was battling higher US Treasury yields. The current situation is nothing new as yields have been rallying for months, but with little to no bullish impulses for gold, lower prices are likely.
The weekly gold chart shows the precious metal testing support around $1,667/oz. again and a break below here leaves $1,617/oz. as the next technical target. The break below the 200-simple moving average is a fresh negative for gold.

Gold price stumbled to thirty month low at $1638.90 on Friday before it turned back to trade at $1643 per ounce later on versus Thursday’s closing price at $1670.95. Volatility in the markets and dramatic FX plays did not leave gold untouched as the precious metal fell another 1.7% this week.

It is usually a confident advice to own gold that remains as a firm favourite during periods of geopolitical uncertainty, when it is looked upon as a reliable safe haven.

But gold prices have not surged. Instead, prices were down almost 20% from their latest March 2022 peak. That puts gold on the tip of a bear market.

Crude Oil

WTI, dropped below $80.00 per barrel on Friday, trading at $78.80, below its opening price by almost 6%, after hitting a daily high of $83.92. During the week, WTI was already down by 8%, extending its decline to the fourth consecutive week. On Wednesday after Fed’s decision which impacted oil prices.

The SPR has now been depleted since President Biden took office from 640 million barrels to 450 million barrels. This depletion is consistent with recent history. Historically SPR volumes tended to grow during Republican administrations and fall during Democratic administrations. That pattern has held true since 1980.

Earlier of Friday, The Hungarian Foreign Minister said Friday that he met his Russian counterpart Sergei Lavrov in New York, where they discussed gas supplies and the construction of the Pax nuclear reactor being built by Russia’s Rosatom.

Oil briefly surged on Thursday during a volatile US trading session while investors’ focus shifted to accelerating concerns related to Russian oil supply and as the BoE’s interest rate hike that came less than expected.

Russia pushed ahead with its biggest conscription since World War II, accelerating concerns about the war in Ukraine that could further impact oil supply.

This Week

On Monday, Italy’s election results are expected to be announced and a speech from ECB President Christine Lagarde will be important to watch for intraday moves. However, major attention will be given to the Ukraine-Russia battles, speeches from Fed Chair Powell and US Durable Goods Orders for clear directions during the week.