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LGT Navigator: Central banks in the grip of inflation – markets in the grip of central banks

June 20, 2022

After the strongest interest rate move by the US Federal Reserve since 1994, the fifth interest rate tightening by the Bank of England since the end of last year, and the first interest rate hike by the Swiss National Bank in 15 years, sentiment on capital markets is dominated by the monetary policy U-turns by the major central banks to fight inflation and remains fragile. Today, financial markets in the US remain closed for the “Juneteenth” holiday.

Central banks in the grip of inflation – markets in the grip of central banks

After the Dow Jones Industrial last week fell to the lowest level since the end of 2020, the leading index on Friday failed to break away from the psychologically important mark of 30'000 points - closing at 29'888.78 points or -0.13%. On a weekly basis, the Dow posted a whopping loss of almost -5% while the S&P 500 gained +0.22% and closed at 3'674.84 points. The technology stocks on the Nasdaq did even better and the indices rose by about +1.2%. However, stock market sentiment continues to be dominated by fears of recession, high inflation, and the prospect of rapidly rising interest rates. On the bond market, the yield on ten-year US government bonds was last quoted at 3.23%.

In Asia, no clear trend was observed at the beginning of the week. In Tokyo, the Nikkei index loses about -1.3%. In Hong Kong, the Hang Seng index loses about -0.15%, while the Composite index on the Shanghai Stock Exchange gains about +0.15%. It seems that investors still have to “digest” the changed monetary policy situation first.

Index adjustment in the EuroStoxx 50: Adidas must make room for Glencore

The sporting goods manufacturer Adidas must vacate its place in the STOXX Europe 50 and make way for the raw materials and mining group Glencore. The so-called “fast entry” rule will be applied. Glencore shares have gained almost +45% this year, driven by booming commodity prices, while Adidas has lost more than a quarter of its value.

Cryptocurrencies in turmoil – bitcoin falls below 20'000 mark

Over the weekend, the price of the digital currency Bitcoin, the oldest and largest digital currency by market value, fell well below the USD 20'000 mark at times. On the trading platform “Bitfinex”, Bitcoin was quoted at USD 17'605 on Saturday, before recovering to over USD 19'000 on Sunday. The price of the digital currency Ether also came under pressure, plummeting to around USD 881. The market volume of all cryptocurrencies currently in existence subsequently fell to around USD 861 billion, less than a third of the record high of almost USD 3 trillion set in November.

Federal Reserve deepens discussion on digital dollar

At a Federal Reserve research conference, Fed Chairman Jerome Powell expressed optimism that “a US central bank currency, or an official digital version, could help preserve the international standing of the US dollar.” The greenback remains underpinned by important foundations, including a commitment to transparency, the rule of law and the full independence of the Fed, Powell said. In addition, the Fed's mandate for price stability contributes to widespread confidence in the dollar as a store of value, Powell said.

Leading indicators signal weakening US economy

The US leading indicator, composed of 10 different economic numbers, fell for the second consecutive month in May by -0.4%, as expected, suggesting that the economy has slowed in response to high inflation and rising interest rates. Weaker consumer confidence, a slowdown in housing construction, and lower stock prices were the main negative factors. Overall, the headwinds for the US economy have intensified, commented the New York-based economic research institute The Conference Board.

At the same time, US industry reported that production in May increased by only +0.2% from the previous month. Thus, industrial output was only half as strong as analysts had expected. Nevertheless, industrial production increased for the fifth month in a row.

Record-high inflation in the eurozone confirmed

According to revised data, Eurostat, the statistical office in Luxembourg, confirmed that the annual rate of consumer price inflation in the eurozone reached +8.1% in May, the highest level since the establishment of monetary union. Inflation is driven by the massive increase in energy prices. These have increased over the year in May by almost +40%. According to Eurostat, food prices were +7.5% higher on average than a year ago. Excluding energy and food prices, the core inflation rate climbed from +3.5% to +3.8% last month.

Economic Indicators June 20

MEZ Country Indicator Last period
08:00 GE Producer Prices (May, y/y) +33.5%
10:00 GE Bundebank Monthly Report

 

Earnings Calender June 22

Country Company Period
SWE Volvo Capital Markets Day

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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