Edited by Francesco Corbellini (Head of Articles)
Jerome Powell's "dovish" speech
By Sebastian Ballarini (Forex analyst)
In his latest speech Jerome Powell clearly announced that the FED will raise interest rates by 50 BPS instead of 75. The chair of the FED also added that cutting rates is not something that will happen in the immediate future since inflation remains high even if the latest data were better than expected. Indeed, according toPowell’s view, rates cut will mainly depend, other than on core goods prices and houses, on the decline of the prices of core services excluding housing. Since wages are the most relevant factor in providing theseservices, the labor market is the main factor to watch in order to forecast the FED’s future behavior. On the other hand, some believe that services prices are mainly influenced by shelter, medical care, and transportation.
This news had a very limited impact on the Treasury market, indeed three-month yields were not affected,while two-year yields decreased by 16 BPS and ten-year yields fell by 5 BPS, confirming the inversion of the yield curve normally considered as a signal of upcoming recession. But could the inverted yield curve be a false signal of recession this time? Three theories can explain why this could be a false signal. According tothe “soft landing view” increasing interest rates would eventually reduce job openings thus rebalancing thelabor market by slowing wages so to reach the target inflation. On the other hand, more realistically, the FED could try to avoid a recession if it starts to lower rates before getting to the target inflation rate and accepting a slightly higher inflation target. On the contrary, the yield curve could be wrong if the market is underestimating for how long rates should remain high to reduce inflation, even if this explanation implies thecurve’s recession warnings are not high enough.
Looking at the currency market, after the speech of chair Powell, the dollar sold off, after having hugely appreciated during 2022 because of the more aggressive rates hikes of the FED compared to other central banks to fight inflation. The Dollar index shows the recent depreciation of the dollar as inflation could be already considered by the market as “history”.
References:
Joe Biden's Inflation Reduction Act is posing a real threat to European green energy companies
By Brent Verhoest (Forex analyst)
Emmanuel Macron, president of the French Republic, recently paid a three-day visit to Washington DC to discuss the potential damages that US President Biden’s $369billion plan to reduce inflation by investing in the country’s green energy production could have on the European companies and the west as a whole.
Biden’s idea behind the IRA was to reduce the reliance on Chinese products of green energy and EVs particularly, not to damage their allegiance, and is therefore very open to discussing how the act can be adapted in order to not unfairly penalize any allies.
However, the IRA legislation is unlikely to be altered. The general consensus in Brussels now seems to be that Europe is going to have to change its public investment regulations in order not to concede an unfairadvantage to US-based enterprises. Ursula von Leyden, president of the European Commission, said “we must respond to increasingly global competition on clean tech”.
Biden did acknowledge that only minor changes to the IRA would make it much easier for European countries to partake but seemed reluctant on there ability of altercations being made to the act.
References:
New horizons for traders
By Laurian David Pop (Forex analyst)
One of the news this week that had a strong impact on the European industry is the decision announced by the American giant Goldman Sachs to transfer a part of its Europe swaps trading team from London to Milan at the beginning of 2023 due to the increasing impact on what Brexit has on this industry. Thus, Goldman Sachs wants to increase its presence on the territory of the European Union and this choice can have a positive impact on students who study in Italy and are eager to work in this industry because, according to statements given by two of the bank's executives, they will especially encourage local employment. Furthermore, as expected, other large investment banks such as Citi or Nomura are about to make the same decision, more and more traders seeing Milan as a city where they want to develop their career, being able to benefit from a better quality of life at a lower price than in London, Paris or Frankfurt.
Another news given by Goldman Sachs is related to a certain decrease regarding the bonuses that traders will receive at the end of the year, despite the fact that annual trading revenue is on track to top $25 billion, 2022 being an extremely profitable for the Global Markets division, registering a 14% increase in the first ninemonths of the year compared with same period in 2021. This decision can be attributed to the current situation, with an extremely high inflation rate and interest rates that continue to rise from one day to the next,thus affecting both the equities market and the bond market. For example, 2022 is the weakest year from the point of view of yield that bonds have had in the last 45 years. Using the Bloomberg US Aggregate Index wecan see that bonds lost their value only five times, the biggest decline being 2.9% in 1994, 2022 representing a negative record in this sense, since the beginning of the year the index has lost more than 11%.
References:
https://www.cnbc.com/2022/12/02/goldman-sachs-warns-traders-of-shrinking-bonus-pool-as- wall-street-hunkers-down-.html
High volatility in the oil market
By Lorenzo Fruttero (Forex Analyst)
During the past weeks oil prices fell from a peak of $92.61 (07/11/2022) to the current value of
$80.34 (02/12/2022), with a slowing demand from China caused by zero-covid policies, and to make matters worse some experts state that the current virus wave has not peaked yet. Volatility of petroleum increased further this week during the popular protests against these policies.
It was an important week in the oil market and the one which is coming will be no less: tomorrow the price cap on petroleum of $60 imposed by the G7 will take effect. The price cap was set 5% under the Urals Oil current evaluation. The purpose of the sanction is to lower Russian oil prices (Urals Oil): if a company or a country buys oil from Russia at a price higher than $60, it can’t be insured by a western insurance company. However, it seems that Russia is already secretly selling its petroleum at a price around $50 to India andChina. Furthermore, Alexander Novak, Russian vice- prime minister has already said it will not sell any oil to countries utilizing the price cap; in addition to this Russia is building its own fleet of tankers to cancel western sanctions.
Brent Oil (blue) and Urals Oil (green). Source: Trading Economics
Today Saudi Arabia, Russia and other Opec+ countries met in Vienna to discuss the target daily production of oil and conforms with the predictions they decided not to decrease extractions. However, the cartel said that a new meeting can be called at any time to stabilize oil prices.
The current situation in oil market is uncertain: if G7 sanctions will be effective Opec countries may decide to cut their production, causing high volatility in the market.
References: China's oil demand to face downward pressure on rising COVID-19 cases: analysts | S&P GlobalCommodity Insights (spglobal.com)
Opec+ says ready to adjust oil output as Russia embargo looms | Financial Times (ft.com)
Petrolio, l’Opec+ mantiene invariata la produzione. Mosca: non rispetteremo il price cap - Il Sole 24 ORE
OPEC+ Expected to Keep Oil Production Steady as Meeting Moved Online - Bloomberg
Alla fine è stato deciso il price cap dell'UE per il petrolio russo. Quanto farà male alla Russia?(money.it)
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