Daily Market Commentary 16th December 2022

The ECB took markets by surprise, not by the 50 point rate rise, but by the aggressive narrative. ECB President, LeGarde, said their were ‘significant rate rises still to come’. The ECB is set to continue rate rises at a steady pace, as the latest rate rise is only up to 2%, while the Fed has rates are above 4.25%, signalling the target to be above 5%. The concern with the ECB, is that the emphasis is put on interest rates as the primary monetary tool, when significant reduction to the balance sheet (EUR$5 Trillion++)is required now and in huge blocks. The ECB have proposed QT starting in MArch 23′ and only in EUR$15/month chunks. This is a grave error and is done to prevent the debt market collapsing. The Bank of England and Swiss National Bank also raised rates by 50 basis points. The surprisingly hawkish language used by the ECB was a boost to the EUR, which initially saw the EUR spike to 1.0750, before market fear saw floods into the US Dollar. The EUR crashed back to 1.0600, while the GBP tumbled to 1.2150, following their own rate rise with noted disagreement amongst Bank of England members.

US and European equity markets were smashed by the ECB moves and further prospects of a recession. US Retail Sales contracted 0.6%, while Industrial and Manufacturing production also fell into negative territory. Central bank commitment to tight monetary policy, has increased the prospect of an extended and deep recession. The rising reserve smashed the commodity currencies, with the AUD collapsing to below 0.6700, while the NZD nose-dived to just above 0.6300. This comes after strong economic data releases in both economic zones. The NZ GDP number surged to 2% for Q3, 6.4% annualised. The AUD Dollar crashed due to recessionary fears and potential hits to commodity demand, despite a strong jobs report. A global recession is here, driven by an energy crises and inflation, while the monetary cure is the bitter pill to swallow.