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PODCAST
In their latest podcast, Brunello Rosa and Manas Chawla discuss the causes and possible development of the recent volatility in financial markets, and its links with the crypto-asset environment.
18 May
In their latest podcast, Brunello Rosa and Manas Chawla take stock of the recent elections in Germany, France and Italy and their implications for the European integration process.
13 May 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss how Europe could be re-organised in concentric circles to permit a more effective and inclusive governance, and prevent conflicts, such as that in Ukraine.
11 May 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the latest revision to the IMF's forecasts, which certify the stagflationary shock to the global economy.
29 April 2022
In this podcast, Brunello Rosa and Manas Chawla discuss the rationality China's apparent decision of embarking Russia as an ally in Cold War 2 vs US.
22 April 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss how the UK aims at becoming a global hub for crypto finance technology and investment.
18 April 2022
In their latest podcast, Brunello Rosa and Manas Chawla discuss the "new world order" that China and Russia are pledging to create, which implies a polarised global economy.
8 April 2022
In their podcast, Brunello Rosa and Manas Chawla discuss how the use of a certain language by the opponents of Russia could make it harder to reach an agreement with Putin in the short run.
31 March 2022
In this podcast, Brunello Rosa and Manas Chawla discuss the difficulties in devising the optimal policy mix to counter the effects of the pandemic and of the war in Ukraine.
24 March 2022
In this podcast, Brunello Rosa and Manas Chawla discuss how the ban of Russian banks from SWIFT may push them to adopt the Chinese CIPS or crypto exchanges to evade the sanctions from the West.
16 March 2022
In this podcast Brunello Rosa discusses the economic impact of the war in Ukraine and the sanctions and the reaction functions of central banks, which are likely to prioritize inflation fighting over support to growth.
9 March 2022
In this podcast we discuss what may be the geopolitical endgame and possible economic and market impact.
3 March 2022
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Volatility In Financial Markets Abounds As Recession Fears Increase
Volatility In Financial Markets Abounds As Recession Fears Increase
Volatility In Financial Markets Abounds As Recession Fears Increase
by Brunello Rosa
16 May 2022
Last week, financial markets were in turmoil once again. Global equities decreased on a weekly basis, with the MSCI ACWI index down by -2.2%, the US S&P 500 index dropping -2.4% and the MSCI EMs falling by 2.6%. With this week’s negative performance, this year is the second worst start to a year for the S&P 500 in history: -17.5% in the first 91 trading days. Logically, volatility has also risen considerably, with VIX rising to 29.35 (versus a 52-week average of 21.7 and a 10y average of 18.0).
Volatility in markets is increasing as investors are becoming sceptical that central banks will be able to engineer a ‘soft landing’ for the economy after the series of rate increases that they are planning to implement in coming months in order to tame inflation. Reasons for concern abound, as investors have suffered from: i) the accelerated pace of monetary tightening that most central banks have announced, most recently the ECB, which may be increasing rates already in July; ii) geopolitical news, with Russia threatening a retaliation to a possible admission of Finland and Sweden to NATO; iii) persistently high inflation data; iv) the impact of strict lockdowns in China, which are further disrupting global value chains; and v) increasing recession fears as the global economy is slowing down.
However, last week, something different from previous weeks occurred. US government bond yields (especially in the US and the eurozone) fell amid the sell-off in equity prices. So, the correlation between bond and stock prices went back to negative after being positive recently. Finally, credit spreads widened, with the effective yield on US “junk bonds” (US High Yield Master II) reaching 7.4%, the highest level since May 2020. All this while bank equity prices continue to fall, with the shares of the five largest US banks down between 20% and 25% year-to-date.
Volatility In Financial Markets Abounds As Recession Fears Increase
Volatility In Financial Markets Abounds As Recession Fears Increase
How can we interpret all this? In the stagflationary scenario that we have observed so far, the combination of higher inflation, lower growth and higher long-term rates, have led to a parallel decrease of bonds and equity prices (positive correlation). But the increase in recession probability means that inflation may be lowered by the reduction of the demand side of the economy, making stagflation fears less pressing. As a result, there start to be risk-off flows into government bonds, thus lowering their yields.
Additionally, rate increases tend to be good for banks, as they steepen the yield curve on which they profit with maturity transformation. But if rate increases risk causing a recession, the weakening of the economy would be bad for bank profitability. As a result, bank equity prices fall.
In all this, price movements have been exacerbated by the sharp sell-off in the crypto-currency space, where Bitcoin has fallen below the psychological barrier of 30,000 and lots of stablecoins went under stress, with the Terra/Luna trade collapsing and even Tether shortly falling to 95.11 cents on the dollar. With USD 80bn held in assets as collateral, sharp liquidations to keep the peg at 1$ would eventually also impact traditional markets, not just the USD 1.3tn crypto-asset market.
LATEST RESEARCH
Financial Warfare Against Russia: Stakes for Gulf Investors and Funds
Gulf State Analytics
12 May 2022
Flash Review: BOE Raises Rates and Begins The Process Of Asset Sale
by Brunello Rosa and Nato Balavadze
5 May 2022
Flash Review: Federal Reserve Raises Rates, Begins QT, And Signals More Tightening Ahead
by Brunello Rosa and Nato Balavadze
4 May 2022
Is There An Optimal Policy Mix To Get The Global Economy Out Of The Current Difficult Conjuncture?
by Brunello Rosa and Nouriel Roubini
28 March 2022
Despite the War, Russia Can Still Count on Meaningful Relationships in the Middle East
by Giorgio Cafiero
6 April 2022
Russia’s Invasion of Ukraine: Scenarios, Endgames And Macro-Financial and Policy Implications
by Brunello Rosa and Marco Lucchin
1 March 2022
The Geopolitical Corner by John Hulsman
The West and the Rest: The War In Ukraine Has Exposed The New Global Division Of Power
The West and the Rest: The War In Ukraine Has Exposed The New Global Division Of Power
The West and the Rest: The War In Ukraine Has Exposed The New Global Division Of Power
by John Hulsman
17 May 2022
Introduction: It Was The Best Of Times...The West Is United
On its surface, the Russian invasion of Ukraine has left the world with one undeniable geopolitical winner. The United States, and in particular the global ‘League of Democracies’ that it heads, has emerged from the crisis far stronger than it went in.
Before the war the rough division of global power saw the two superpowers, the US and China, vying for dominance. Just beneath them, a series of great powers (Russia, the EU, the Anglosphere, India, and Japan) maintained the ability to either go their own way or side with either Washington or Beijing. Then the Anglosphere, India, and Japan were firmly in the American camp, in each case largely in response to China’s over-aggressive bullying in the vital Indo-Pacific region, where much of the world’s political risk and much of its future economic reward are both located. The EU hovered between neutralism and a pro-American stance, and Russia between neutralism and a pro-China stance.
The Kremlin’s invasion of Ukraine has led to three major changes in terms of this global power distribution. The EU, at last aware that history has not come to an end, is now firmly back in the American camp. A chastened Russia, now an international pariah as well as a laughingstock due to its failure to finish off rag-tag Ukraine, has had little choice but to throw in its lot firmly with China.
The West and the Rest: The War In Ukraine Has Exposed The New Global Division Of Power
The West and the Rest: The War In Ukraine Has Exposed The New Global Division Of Power
This leaves the global distribution of power at the great power level firmly to America’s advantage; the movement of fading power Russia into the Chinese camp is more than offset by the corresponding movement of the EU into the US camp. A united West (US, EU, Anglosphere, Japan) is clearly the dominant global force, with an unloved ‘League of Autocracies’ by far its inferior rival for global dominance.
It Was The Worst Of Times...The Developing World Is Hedging
But there has been a third movement on the global chessboard, the startling gambit of India toward a neutralist position over the Ukraine war, that is a harbinger of bad news for the dominant League of Democracies.
[...]
(This is an excerpt of Dr. Hulsman's latest article, which you can read here).
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. His original writing work can all be found at johnhulsman.substack.com.
Looking Ahead
The Week Ahead
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The Quarter Ahead
Week: 23 - 29 May 2022
The Week Ahead: PMIs To Decrease In DMs; US Q1 GDP To Shrink, Whereas Germany Q1 GDP To Rise; US Core-PCE To Ease
In the US, in Q1, according to the second estimate of GDP, the economy is expected to shrink by -1.4% q-o-q (p: 6.9%). In April, core PCE is expected to ease further to 4.9% (p: 5.2%). In May, services and manufacturing PMIs are expected to decrease to 55.4 (p: 55.6) and 57.9 (p: 59.2) respectively.
In the EZ, in May flash estimates are expected to show: i) manufacturing PMI to decrease to 54.9 (p: 55.5); ii) services PMI to decline slightly to 57.5 (p: 57.7); and iii) composite PMI to decrease correspondingly to 55.3 (p: 55.8). Consumer confidence in May is likely to recover slightly to -21.1 (p: -22).
Among the largest EZ economies, Germany’s Q1 GDP is seen advancing by 0.2% q-o-q (p: -0.3%) and at 3.7% y-o-y (p: 1.8%).
In the UK, in May: i) Services PMI is expected to decrease to 57.3 (p: 58.9); ii) Manufacturing PMI is seen decreasing to 55.1 (p: 55.8); and iii) Composite PMI is likely to fall to 57.4 (p: 58.2).
The Quarter Ahead
The Quarter Ahead
The Quarter Ahead
The Quarter Ahead: Russia Declares Victory At Azovstal; US Delivers Support To Ukraine; G7 Met In Germany; Elections in Australia
Russia declared a victory at Azovstal steel plant in Mariupol, following the months-long battle. It would mean that Russians have complete control of Mariupol, which is a strategic port city. Heavy fights continue in eastern Ukraine, where Russian missiles destroyed the cultural centre in Lozova and injured seven people.
The US provides additional support to Ukraine. Senate passes $40bn aid bill, which would fund military and humanitarian aid. In addition, the US is expected to keep 100,000 troops stationed in Europe in case Russia threatens Sweden, Finland or NATO members.
G7 plan EUR15 bn aid for Ukraine. G7 finance ministers and central bank governors met in Germany on 18-20 May. A meeting communiqué also stressed ‘elevated debt levels’ and inflation that ‘have reached levels not seen for decades’.
The 2022 Australian federal election was held on May 21, 2022, to choose the prime minister and the ruling party. The Labour party led by Antony Albanese has claimed victory and incumbent PM Scott Morrison (Liberal-National coalition) conceded the result.
Leisure and business flights rise past 2019 levels for the first time. Demand rises as COVID restrictions loosen. According to the Mastercard Economics Institute’s travel report, global flight bookings for leisure travels rose 25% above pre-pandemic levels in April. Global business flight bookings surpassed pre-pandemic levels too in March, with the return to the office being an important driver.