Central banks vs Inflation
The Fed ensures that US inflation is transitory. So, it was quantitative easing more than a decade ago. Central banks may face unforeseen challenges if inflation remains beyond control. The Fed and the ECB believe that their fiat currency is the ultimate tool of power. Thus, more money means more power. Why is this wrong? Would a big market correction be beneficial?
This is not another Bitcoin rant about how crypto will deliver the global economy from an unprecedented crisis. Sometimes less is more and this applies to the post-lockdown situation.
Leading central banks and their underlying governments opted to increase the monetary mass to deal with the pandemic consequences. To do so, they were forced to cut interest rates, hoping that this situation would be transitory, and the resulting deflation could fuel the economic recovery.
Nothing went according to the initial plan. Central banks need to continue the money printing strategy and inflation impacts all walks of life. Policymakers have two options.
On the one hand, they can let inflation go berserk, thereby devaluing the
savings of the middle class and most pension plans in developed countries
slowly. Such an approach is obviously prefered by politicians because the
consequence would span over a longer period avoiding any sudden crash. The
viability of this strategy is not clear because in modern history, big
inflation was rarely associated with prosperity.
On the other hand, they have the option to "give to Caesar what belongs to Caesar". By increasing the interest rates and bringing back value to currencies, central banks could bring a brin of light.
The resultant significant market correction would bring reason in market prices and reduce assets’ overvaluation. Obviously, the observed rate of defaults would increase, and the economic growth would have a J-curve effect; but, this could be the only way to save the US dollar from its own demise.
Every time the market has corrected, since 2008, it's always been the Fed that's made the bottom. The Fed has always saved the market either by cutting rates, launching QE, or threatening to launch another round of QE. Peter Schiff, American investor
The US Labor Department published the employment figures presenting a solid 559,000 increase in nonfarm payrolls. In normal conditions, such a number would be saluted, but for a post-lockdown recovery, it is judged as significantly low. The US unemployment rate fell to 5.8%, but fears of significant workforce shortage are still present. Suppose growth in newly created employment does not suffice to refuel the economy. In this case, businesses will face the risk of dealing with higher wages to attract those workers used to stimulus checks while being unproductive. This is another major factor that could trigger rampant inflation.
The U.S. Food and Drug Administration authorized a lower dose of Regeneron
Pharmaceuticals COVID-19 antibody cocktail. The innovative cure for the new
coronavirus can be administered by injection, thereby easing the therapeutic
process. The company came to our attention in October 2020, when the former
US president took the experimental treatment after he contacted COVID-19.
Regeneron made significant progress, and the FDA approval triggered a jump in its share price. There is silent competition between COVID vaccine providers and cure developers. While in the short run, vaccines had priority, with the new strains becoming more frequent, public health policymakers may consider therapeutic options.
The British pound
Brexit, three waves of coronavirus infections, reopening under question … The United Kingdom had many challenges to face in 2021. The British pound did not go into disarray. Over the past week, the GBP found some momentum compared to the Euro. The British government managed to secure a few trade deals with Norway, Iceland and Liechtenstein. The absence of a fully-fledged trade deal with the EU is one hindering factor for post-Brexit Britain. Downing Street’s tenant may look for new options to boost the trade of the British economy. These new deals are encouraging signs and brought optimism for the British pound.
The EUR/USD showed random behaviour over the past few weeks in a tunnel between 1.20 and 1.225. Are there fundamentals to see a breaking move outside of this range? The summer may not bring the answer. The only swings that we could observe are related to the likelihood of central banks increasing their interest rate somewhere in the near future. EUR/USD is not pricing the current situation but a potential future that could solve all issues encountered in the present. Expectation-based valuation could leave markets in a hiatus for a long period.
The reopening of the society resultant from the significant decay of new coronavirus cases may benefit cinema giant AMC Entertainment. The Reddit forum r/WallStreetBets generated last week a revival of investors' interest in the so-called” meme stocks”. AMC’s share prices increased three times reaching almost 70 USD amid a new investing frenzy. This unforeseen market move was surprising even for AMC’s management. The company issued a statement saying that this bubble is "unrelated to their underlying business" and went even to recommend investors to dump the stock "unless they are prepared to incur the risk of losing all or a substantial portion of their investment."
The Dow Jones ended the week above the 34,700 level after touching a low below 33,500. The next weeks are a make or break point for the stock market, and we could observe a significant summer correction.
Surprisingly, the world’s leading cryptocurrency survived the week without a new significant dip and climbed above 37,000 USD. The market is still turbulent with significant dislocations. This is not the end of the bearish cycle, and for the moment, there are no signs of an exit from the turbulent zone.
The Gold ounce ended the week in negative territory below the 1,900 USD, but we could expect a move towards 2,000 USD amid future correction on the leading indices.