Inflation is Down but Not Out
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Hi everyone,
Welcome back to the Market Wrap. In this week’s article, I will consider the US stock tumble at the end of the week; the recent cryptocurrency crackdown in the US; Rishi Sunak taking his first real gamble as Prime Minister & the high level of EU businesses filing for bankruptcy. Enjoy!
US Inflation hotter than expected
US stocks took a tumble in the latter stages of the week, with the S&P500 down 1.4% on Thursday, due to inflation not cooling quite as quickly as investors had anticipated. The CPI index declined to 6% - from 6.2% in December - however, the general consensus among investors was that inflation would have decreased at a substantially faster rate.
However, the fundamental US economy appears to remain strong - as retail sales data released this week highlighted - despite the Fed continuing to aggressively increase interest rates. Ultimately, the longer inflation remains high, the more likely it is that the Fed will continue to pursue its policy of having relatively high interest rates. Subsequently, the less likely it is that the US economy will experience real (opposed to nominal) growth and the more probable it is that investors will seek refuge in bonds, offering relatively high yields.
US Crypto Crackdown
The US authorities have begun a crackdown on cryptocurrencies at an alarming rate; making investors fear that it is being pushed out of one of the world’s largest markets. With the industry still in its infancy, it has existed largely outside of traditional financial structuring and regulation thus far. Mainstream lenders may look to cut ties with crypto companies and advocates for cryptocurrencies feeling that this crackdown will hamper innovation within the industry and diminish their decentralised nature. It is still to be seen if investor confidence in cryptocurrencies will take a nosedive from its recent resurgence.
S&P Cryptocurrency Broad Digital Market Index, Source: spglobal.com
Sunak’s first Gamble
Rishi Sunak is set to take the biggest political gamble of his premiership, with critics, such as Peter Mandelson joking that it is ‘his first political gamble.’ He will attempt to settle the dispute with the EU over NI trade. From Sunak’s perspective, the main motivation behind the deal is the potential to be able to persuade the DUP (Democratic Unionist Party) to end its boycott of Stormont.
However, even if the DUP’s boycott persists, Sunak still has an opportunity to gain from the deal; to thaw frosty relations between the EU and the UK. Provided that there is mutual trust and cooperation, there is a distinct possibility that the UK could negotiate improved cooperation in defence and energy, which could see a decline in energy prices for UK consumers and businesses.
EU Bankruptcies Booming
The number of EU businesses filing for bankruptcy rose to the highest level for at least eight years in the final quarter of 2022. This may indicate that ‘zombie’ economies kept afloat through financial aid are starting to deteriorate. The primary reason for the increase in bankruptcy filings can be blamed largely on inflation; specifically, increasing energy prices, wages and financing costs.
The financial aid many companies received during COVID-19, with stimulus packages, in tandem with low interest rates manufactured economic conditions that kept weaker companies buoyant. Economic experts generally feel that the demise of the vast majority of these businesses was inevitable and that the preferable economic conditions experienced during the height of the COVID-19 pandemic merely delayed them ultimately filing for bankruptcy.
Source: Financial Times
Thanks for reading! Have a good week.
Oliver
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.