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August 17, 2022
EDITORIALOP-EDOPINIONPOINTS OF VIEW

Complex global situation triggers Central Banks reaction

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu 

 Investors worldwide are concerned by high rates of inflation, the ongoing military conflict in Ukraine and its effects, rising interest rates and politics. Markets are in turmoil with each piece of news concerning the above subjects determining movements that hardly fall into patterns. Every central bank interest rate increase is assessed by investors trying to evaluate if it will curb economic growth or not.

The latest request from Moscow that the “unfriendly” states to pay for the Russian gas in rubles was met with a firm refusal. This has the potential to create a de facto embargo for the Russian gas in Europe. Some European countries are starting to prepare for this event. The Dutch government has launched a campaign urging people to turn down their central heating and take shorter showers to save power and to reduce the country’s dependence on Russian fuel imports. Italy PM Draghi mentioned in an interview to Corriere della Sera, that Europe can reduce Russian gas imports quicker than previously estimated because there is gas in storage and “we will get gas from other suppliers”. In Germany the finance minister Christian Lindner said that “the dependence on Russian energy imports must be reduced quickly and permanently. An important contribution to this is made by floating LNG terminals, for which we should release the funds now.”

All these efforts may result in a further increase in natural gas prices adding to an already high inflation. Despite the Euro area inflation being almost four times the ECB target of 2%, the ECB is set to end its net asset buys in the third quarter of this year. Only after that it may start raising the  interest rates gradually. The Fed was more proactive than the ECB to act on the 8.5% inflation rate by already making a first 0.25% rate hike in March and signaling that there will be more during the year. Bank of Canada raised its target for the overnight rate by 50bps to 1% last week. It is the second consecutive rate hike and the biggest in 20 years, pushing borrowing costs to the highest in 2 years when the coronavirus pandemic started.

In Romania, the interest rate is already at 3%, still lower than the Czech Republic with 5%, Poland with 4.5%, Hungary with 4.4%. On the opposite spectrum, Bulgaria and Slovakia are still at 0% interest rate.

In Asia, several Central Banks took anti inflationary moves tightening monetary policies and some increasing interest rates. The Bank of Korea increased the interest rate for the first time in three months with 25 basis points to 1.5% in an attempt to curb inflation that rose to 4.1%, double the bank’s target of 2%. New Zealand raised rates for the fourth straight meeting with a surprising 50 basis points to 1.5%.

These growth deceleration concerns are triggered in China not only by the Ukrainian conflict induced risks but also by the Covid lockdowns and a weakening property market. The latest GDP data came positive with a 4.8% expansion in the first quarter of the year but unemployment climbed and retail spending dropped 3.5% for the first time since 2020.

While still maintaining the interest rate at 3.7% in order to increase liquidity in the market the People’s Bank of China  it would cut the amount of cash that banks must hold as reserves for the first time this year, releasing about 530 billion yuan ($83.25 billion) in long-term liquidity to bolster a sharp slowdown in economic growth.

The complex global situation, fear of economic slowdown, interest rates hikes, politics, monetary policies, corporate earnings and supply chain issues made the latest American Association of Individual Investors Sentiment Survey to show the lowest optimism in the past 30 years. The expectations that stock prices will rise over the next six months, decreased to 15.8%. This is among the 10 lowest readings in the survey’s history, which dates back to 1987. The bull-bear spread of –32.6%, is an unusually low number too. But statistically, the S&P 500 index realized above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread.

The Romanian investors are more optimistic about the prospects of growth of the S&P 500 index in the next 12 months, 37% believing that it will grow, a 3% increase from December 2021, has shown the eToro Retail Investor Beat survey.

 

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

 

About eToro Group

 

eToro is a multi-asset investment platform that empowers people to grow their knowledge and wealth as part of a global community of successful investors. eToro was founded in 2007 with the vision of opening up the global markets so that everyone can trade and invest in a simple and transparent way. Today, eToro is a global community of more than 27 million registered users who share their investment strategies; and anyone can follow the approaches of those who have been the most successful. Due to the simplicity of the platform users can easily buy, hold and sell assets, monitor their portfolio in real time, and transact whenever they want.

 

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