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August 8, 2022
EDITORIALOP-EDOPINIONPOINTS OF VIEW

Nervous investors react to any news predicting the future

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 Markets are very nervous – the uncertainty, news about the Ukrainian military conflict, the Central banks rates decisions and economic growth are pushing the shares prices randomly without any discernible pattern. The latest episode happened on Friday when the US S&P 500 index briefly dropped below this year’s minimum on good news from the Nonfarm Payrolls report. After a few hours of tensions the market rebounded signaling that buyers are taking hold, at least until the next news. The opposite action happened on Wednesday after the Fed decision to increase the interest rate with 0.5%. The market surged 3% considering that it was a good news that the Fed ruled out a 0.75% interest increase.

The Fed rate hike decision is putting some pressure on the ECB too. The latest declarations are depicting the acknowledgement of “stagflation signs”. Finland Central Bank Governor Olli Rehn believes that the ECB should move quickly with a 0.25% rate hike. However, the ECB is concerned that the anti inflationary actions will derail the economic growth. Rehn still sees around 2% growth year in the Eurozone. Europe is taking a hit from the Ukraine conflict, from the trade and from the energy dependency, says Rehn.

In its efforts to curb inflation, Romania National Bank will announce tomorrow the rate decision with markets expecting a 0.5% increase. With Robor already at 5.31% a new increase will make commercial loans more expensive leading to a decrease in purchasing power and demand.

A sign of worry is coming from the United States. With Europe hungry for natural resources spanning from oil and gas to coal, metals and rare elements, and trying to separate itself from Russian dependency, the latest job reports from the United States is showing that the smallest number of new workplaces in the US was created in the Natural Resources and Mining industry: only 4000. One explanation might come from the slow speed with which new investments in fossil fuels are pouring despite the large demand. Global oil drilling activity is the closest proxy to new supply investment. This has dramatically lagged the ramp up in oil prices, to a degree not seen in recent history. Drilling rig counts are down over 50% from prior peaks. This fall has been led by the US, with rising environmental headwinds, bank lending constraints, and investor and management focus on profitability rather than production after the 2015 prices crash. By contrast, the Middle East has been the most resilient, where production costs are lower and national oil companies dominate. And in essence this might mean that the oil prices are to stay elevated for a while, with continuous impact in inflation.

The US ADP National Report is showing that in April 247.000 new jobs were created in the private sector. While it looks like good news there is a figure in that report that is starting to show the issues brought by high inflation for the vulnerable companies. Small firms with less than 50 employees lost 120.000 jobs. Drilling down on the figures, we see that the bulk was given by very small companies below 20 employees that lost 96.000 workplaces. Surprisingly, despite the pandemic restrictions lifted, most of the small companies affected were from the Services providing sector that lost 103.000 jobs. History showed that most of the effects that are already seen in the US economy have a tendency to migrate in Europe too. It is very likely that this effect will happen in Romania too, the rise in interest rates making credit more expensive vulneralizing the small companies that depend on loans to survive.

Across the globe, Central Banks are raising the interest rate to fight inflation, by making credit more expensive in order to discourage demand. However the ECB is not yet falling under peer pressure of other Central Banks together with the Swiss Central Bank and Bank of Japan, the other two Banks that still keep interest rates below zero. The markets are trying to assess the risks on the economic growth. The Bank of England decided to raise the interest rate another 0.25% to 1% and also warned that households are facing a 1.75% drop in real disposable income this year, the second-biggest fall since 1964. Bank of England’s forecasts “stagflation”, a 10% inflation and recession by end of this year.

The worrying signs, the resilient high energy prices, the expensive loans impacting companies and individuals, the inflation and the concerns about the economic growth translate to investors’ trust in the economies. According to the eToro Retail investor Beat, this year, 63% of Romanian investors are not confident about the development prospects of the global economy,  and 69%
do not believe in the positive evolution of the Romanian economy.

 

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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.

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