Weekly Digest: Global rise in interest rates, volatile markets
24/09/22: Major central banks announced sharp increases in interest rates as inflation keeps accelerating, recession is out of the bag in the UK and looming everywhere else, Putin slides into war gear, Trump in (more, bigger) legal troubles, and more…
💡Quote of the week
“Central bank tightening is far from over, inflation has probably peaked with easing commodity prices, but wage cost pressures have not subsided which could mean more persistent and sticky core and services inflation.” — Chua Hak Bin, economist at Maybank Investment Banking Group in Singapore.
🏦 Historic week for global interest rates? Major central banks from around the world, including U.S., U.K, and Switzerland have raised their key interest rates this week, most of them by an aggressive 0.75%, or more. (Bloomberg)
Many policy-makers from around the world raised their interest rates this week, making it clear the main worry today was indeed the strongest run of inflation since the 1980s.
When taking a step back, this week marks a dramatic change in tone and pace from a year ago, when governments were publicly promising that pandemic-era spikes in prices would soon fade.
The ECB and the Fed have already promised more aggressive rate hikes well into 2023, while the Bank of England has publicly announced the country to be in recession.
Here are a few highlights of those hikes:
United Kingdom: +0.50%
United States: +0.75%
Switzerland: +0.5% (The Swiss Central Bank was the last in Europe to apply negative interest rates, it has now turned positive at 0.5%).
European Union: While the ECB is already raising rates at the fastest pace on record, Christine Lagarde, ECB President, announced they might raise interest rates further, to a level restricting for economic growth, in order to combat high inflation.
To keep the list short-ish, here is a map of all the countries that hiked rates by 0.75% or more in one move in 2022:
In a rather different approach, Turkey once again surprised markets with a 100 basis point cut (-1%)… despite inflation in the country surging beyond 80% and the Lira trading at record low.
Read our SPOTLIGHT to learn what inflation feels like in real-life for Turkey.
👍 The gold price has remained rather steady this week, proving once again its usefulness as a protective asset in the midst of increased geopolitical tensions, accelerated market volatility, and new global interest rates hikes.
Gold is considered a hedge against inflation, market uncertainty, and geopolitical risks. Right after Russia’s invasion of Ukraine in early February 2022, the gold price soared to a one-year high of $1,970 an ounce.
Read our SPOTLIGHT to learn how geopolitical tensions impact the gold price.
🎢 Rollercoaster down. Global stocks seem to be going up and down, but mostly down, this week as investors' risk appetite takes a hit from Putin, major interest rate hikes, and recession in the UK, a volatility that’s already sparking a flight to safe-haven assets like gold and bonds. (CNBC)
The stock market rose as investors anticipated another interest rate hike from the Federal Reserve as it battles rising inflation.
After volatile sessions on Wednesday, with the S&P500 closing 500 points in the red, European and U.S markets opened lower or flat on Thursday morning.
💡 In our next SPOTLIGHT article, we will explain how to navigate stock market volatility. Don’t miss it, subscribe to our newsletter now!
🛒 Consumer blues. Euro-zone consumer sentiment has dropped to its lowest level on record according to a monthly gauge from the European Commission. (Bloomberg)
European households are expecting an unprecedented winter energy crisis and an acceleration of already soaring inflation.
A negative sentiment that is likely to get worse as economists see the Euro-area entering a recession in the coming months as almost inevitable.
On a darker note, Deutsche Bank is seeing an even deeper recession due to Russia’s slashing of energy supplies, with a predicted annual contraction of 2.2% for 2023.
🇪🇺 An Eiffel Tower blackout, shorter showers, and slower driving: that’s how Europe plans to reduce gas use this winter. By the way, if Europe could reduce its gas usage by 15%, it would be able to cope with winter despite limited supplies and high energy prices, some reports show. (CNBC)
In France, President Emmanuel Macron called for a 10% reduction in gas use and warned that forced energy savings would be considered if voluntary efforts don't work.
In Germany, the government introduced a batch of measures that should reduce gas usage by 2%. Including heating public buildings to a maximum of 19 degrees Celsius, and banning shopfronts from being illuminated at night.
Read our spotlight: Europe's Energy Crisis: How to prepare for Winter?
📷 Image of the week
🇷🇺 “The path to oblivion”: Ukraine's military gains could worsen Russia's economic situation. “Even more so than before, the Russian economy looks set to descend into a gradually deepening recession,” Holger Schmieding, chief economist at Berenberg, says. (CNBC)
“The mounting costs of a war that is not going well for Putin, the costs of suppressing domestic dissent and the slow but pernicious impact of sanctions will likely bring down the Russian economy faster than the Soviet Union crumbled some 30 years ago,” Schmieding added.
What else is happening
🪖 Putin escalating. Putin mobilized 300,000 troops for the war in Ukraine, accusing the West of engaging in nuclear blackmail against Russia and warning again that Moscow had “lots of weapons to reply.” (CNBC)
In a rare prerecorded televised announcement, Putin said the West “wants to destroy our country” and claimed the West had tried to “turn Ukraine’s people into cannon fodder,” repeating his earlier accusations that Western nations had started a proxy war against Russia.
💧 Trump’s final drop? On Wednesday, the New York state’s attorney general filed a civil fraud lawsuit against Donald Trump and three of his children. Political and legal experts believe this could be the final blow for the former US president’s hopes of an election-winning comeback.(Guardian)
Trump, along with three of his children involved in the family business, is accused of lying to tax collectors, lenders, and insurers, falsely inflating his net worth by billions in order to enrich himself and secure favorable loans in what is qualified as a “staggering” fraud scheme.
“He’s done,” said Allan Lichtman, a history professor at American University, in Washington, who has accurately predicted every presidential election since 1984. “He’s got too many burdens, too much baggage to be able to run again even presuming he escapes jail, he escapes bankruptcy. I’m not sure he’s going to escape jail.”
🔌 Crazy energy. Amidst skyrocketing energy prices, French President, Emmanuel Macron, is warning small and medium-sized businesses to hold off signing new electricity contracts at “crazy prices” while his government tries to wrestle the energy market back to normal. (Bloomberg)
Macron is on a drive to calm down companies and households pressured by energy providers to sign revised power deals.
“Don’t sign them today” he said on BFMTV, “We’re in the process of renegotiating the price of electricity and gas to make the markets function again. In the coming weeks, we will ensure collectively in Europe, with the Americans and others, that we return to more reasonable prices and give visibility on gas and electricity prices so it’s all bearable.”
🪣 A bucket of gold. The hard-to-believe story of a petty thief who stole $1.6 million in gold, in broad daylight, on a busy New York street in broad daylight, and who simply walked away… Well, before getting caught a few thousand kilometers away. (NBC)
While walking down the street, Julio Nivelo, a petty thief from Nicaragua, took his chance and grabbed an unsuspecting bucket from an unmonitored armored truck, to find out he’d just stolen gold bars worth $1.6 million.
What ensued seems out of a movie: betrayal, a russian money launderer, an escape to Nicaragua, an arrest, and finally, jail.
Now Julio is stuck in Nicaragua and unable to go back to the U.S., where his precious money seems to have disappeared mysteriously, but where his family is still waiting for him.
See you next week!