Markets rebounded strongly Friday, to close out yet another week of extreme volatility and overall losses. The underlying market theme here is one of inflation, rising interest rates and supply-chain problems. All of these factors point to a deep recession, waiting to be confirmed by the statistical data. All major Central Banks have now recognised inflation as their major problem and all are acting, belatedly, to address the crises. All have been far too late to the party and inflation is on the march, translating into a damaging recession. The actions taken by the Central Banks are late, but also half-hearted, as they continue to pour liquidity into the monetary system through QE. This should have been halted a long time ago and needs to be enacted immediately, along with QT, with a substantial contraction of their collective balance sheets. Monetary policy has been funding fiscal deficit blow-outs and the accumulation of massive debt levels, which now prevent the rise of interest rates, for fear of the inability to service debt.
US equity markets are feeling the pinch and are on the verge of a ‘Bear Market’, which a recession will determine as to it’s severity and depth. The US Dollar has seen a flight to safety, but this lasts only as long as faith remains in the currency holding reserve status. The EUR has crashed below 1.0400, while the GBP regained 1.2200, in an inglorious collapse. The energy crises in Europe will only deteriorate further, giving legs to the economic and inflation crises. The sanctions imposed upon Russia have backfired badly on Europe, as they realise their demand for resources is more fundamental than a ‘Gucci’ handbag.
Commodity currencies have suffered the rise in the reserve, but the blow has been softened by the rise in commodity prices. The NZD has crashed to 0.6200, while the AUD has plunged below 0.6900, ahead of the all important Federal Election scheduled for the 21st of May. This could add further spice to the performance of the economy and the currency.