European inflation blew through expectations, hitting an annualised 8.6%, destroying any hope of ‘peaking’ or ‘transitory narrative’ delusions. The ECB has failed to act on inflation, has maintained record liquidity through QE, and held interest rates negative. The latest iteration from ECB Chair, the most incompetent LeGarde, is rates will rise in July. The previous policy statements held that QE must be reversed before interest rates could rise, but this cessation of QE as a prerequisite to rate rises, has somehow evolved. The ECB will allow German, Dutch and French bonds to mature, but instead of rolling off the balance sheet, will be re-invested in Southern European bonds (Portugal, Spain, Italy and Greece). You can see where the deficit and debt problem lies, challenging debt servicing and this is an attempt to ‘cap diverging interest rate spreads’. This is fiddling while Rome burns.
Global equity markets have taken an absolute pounding, in the second quarter, compounding the losses from Q1. The NASDAQ has lost more than 22% of market capital in Q2 and is off 32% from November record highs. The S&P, Dow and European Bourses also suffered dramatic losses in he first half of 2022. This is likely to continue, as the root causes of this recession have not been addressed. Fiscal and Monetary expansionism has lead to destructive and rampant inflation, destroying citizens standards of living, which is only made more painful by the energy crises. Green-Energy Policies employed by leading Western nations, have made the energy supply vulnerable to supply and cost spikes, which has been exposed and realised by the sanctions. None of these factors will change in Q3. The US and Europe are in recession, to be statically confirmed, which will only deteriorate as we see rising Unemployment and wage-price spirals adding to inflationary pressures.
The EUR slipped back to 1.0420, while the GBP dropped below 1.2100. The ECB will meet this coming week but expectations are for further manipulation of the Bond markets. The RBA will meet and raise rates, once again (probably by 50 basis points), which puts them way behind other Western Central Banks (other than the ECB and Bank of Japan). The AUD bounced off 0.6760 on Friday’s close, but remains vulnerable, while the NZD hit 2020 pandemic lows of 0.6150.
Markets will focus on inflation, growth and Central Banks, in the coming week. US markets are closed for the Independence Day long weekend, so expect a quiet start on markets. All eyes will turn to Non Farm Payrolls in the US, later in the week, as Labour markets may be the next recessionary shoe to drop?