Global Economy & Markets, Weekly Roundup 07/06/22
The rise in government bond interest rates resumed, as the Federal Reserve began reducing its $8.9 trillion balance sheet
Key Takeaways
Government bond yields rose significantly in the past week. Specifically, the US Treasury 10-year yield increased by 21 bps wow to 2.96% and further by 8 bps on Monday to 3.03%. On the other side of the Atlantic, the Bund 10-Year yield increased by 31 bps wow to 1.26% and further by 4 bps on Monday to +1.30%, an 8-year high.
Emerging markets’ equities overperformed (+1.7% wow | -14% ytd) their Developed markets peers (-0.8% wow | -14% ytd), as Chinese equities (weight in MSCI EM: 31%) surged by +3% wow and by further +3.1% on Monday due to, inter alia, the partial easing of the imposed restrictive measures.
On monetary policy, the focus will be on the meeting of the ECB on June 9th. Based on recent officials' commentary, the ECB is expected to announce that asset purchases will end in July, with the size of its balance sheet expected at €8.8T (72% of 2021 euro area GDP).
In addition, interest rate hikes appear all but certain in each of the two subsequent meetings (July 21st & September 8th). Attention is turning on whether the ECB will leave the door open for incremental steps of 50 basis points (instead of 25 bps) under the roadmap put forward by Lagarde two weeks ago when adjusting monetary policy (gradualism, optionality and flexibility).
OPEC+ decided to accelerate its oil output increase plan, which entails incremental monthly steps of 432k barrels per day, bringing forward the September hike to July and August. The additional hike is to be equally distributed, suggesting a net quota increase of 648k barrels per day in each of these two months. Political pressure for a more ambitious approach is set in to intensify, with US President Biden appearing poised to visit the Middle East in July.
Markets received the news with cautiousness, as some countries already fail to adhere to tallied quotas. In April, the OPEC countries which fall under quotas (excluding Iran, Libya & Venezuela), produced 24.5 million barrels/day instead of a planned 25.1 million barrels/day. Brent prices were broadly stable on a weekly basis, to $120/barrel, with prices being supported by the improved demand outlook, following China’s decision to lift several of its Covid restrictions.
In China, fiscal support to the economy is stepping up including, inter alia, via: i) further VAT credit rebates of RMB140 bn (total of RMB1.64 tn in 2022) to be delivered by July; ii) RMB320 bn in postponement of social security tax payment for SMEs and some pandemic-hit industries; iii) additional policy bank lending of RMB800 bn for infrastructure projects; iv) a RMB300 bn railway construction bond and; 5) a frontloading of 2023 budget for transfer payments (RMB400bn). In all, additional fiscal stimulus measures are estimated at c. RMB3 tn (1.6% of GDP).
United Kingdom’s Prime Minister Johnson faced on Monday (June 6th) a vote of confidence within his party, with dissatisfaction being prompted by several social gatherings at his office and residence, which were in breach of covid-lockdowns at the time (the so called “Partygate”)
Mr. Johnson survived the vote of confidence, as 211 (59%) of Conservative Party Members of the Parliament (MPs) renewed their confidence. Nevertheless, with 148 (41%) voting against Mr. Johnson, his leadership status in the party came out of the process damaged.
Key Takeaways
Government bond yields rose significantly in the past week. Specifically, the US Treasury 10-year yield increased by 21 bps wow to 2.96% and further by 8 bps on Monday to 3.03%. On the other side of the Atlantic, the Bund 10-Year yield increased by 31 bps wow to 1.26% and further by 4 bps on Monday to +1.30%, an 8-year high.
Emerging markets’ equities overperformed (+1.7% wow | -14% ytd) their Developed markets peers (-0.8% wow | -14% ytd), as Chinese equities (weight in MSCI EM: 31%) surged by +3% wow and by further +3.1% on Monday due to, inter alia, the partial easing of the imposed restrictive measures.
On monetary policy, the focus will be on the meeting of the ECB on June 9th. Based on recent officials' commentary, the ECB is expected to announce that asset purchases will end in July, with the size of its balance sheet expected at €8.8T (72% of 2021 euro area GDP).
In addition, interest rate hikes appear all but certain in each of the two subsequent meetings (July 21st & September 8th). Attention is turning on whether the ECB will leave the door open for incremental steps of 50 basis points (instead of 25 bps) under the roadmap put forward by Lagarde two weeks ago when adjusting monetary policy (gradualism, optionality and flexibility).
OPEC+ decided to accelerate its oil output increase plan, which entails incremental monthly steps of 432k barrels per day, bringing forward the September hike to July and August. The additional hike is to be equally distributed, suggesting a net quota increase of 648k barrels per day in each of these two months. Political pressure for a more ambitious approach is set in to intensify, with US President Biden appearing poised to visit the Middle East in July.
Markets received the news with cautiousness, as some countries already fail to adhere to tallied quotas. In April, the OPEC countries which fall under quotas (excluding Iran, Libya & Venezuela), produced 24.5 million barrels/day instead of a planned 25.1 million barrels/day. Brent prices were broadly stable on a weekly basis, to $120/barrel, with prices being supported by the improved demand outlook, following China’s decision to lift several of its Covid restrictions.
In China, fiscal support to the economy is stepping up including, inter alia, via: i) further VAT credit rebates of RMB140 bn (total of RMB1.64 tn in 2022) to be delivered by July; ii) RMB320 bn in postponement of social security tax payment for SMEs and some pandemic-hit industries; iii) additional policy bank lending of RMB800 bn for infrastructure projects; iv) a RMB300 bn railway construction bond and; 5) a frontloading of 2023 budget for transfer payments (RMB400bn). In all, additional fiscal stimulus measures are estimated at c. RMB3 tn (1.6% of GDP).
United Kingdom’s Prime Minister Johnson faced on Monday (June 6th) a vote of confidence within his party, with dissatisfaction being prompted by several social gatherings at his office and residence, which were in breach of covid-lockdowns at the time (the so called “Partygate”)
Mr. Johnson survived the vote of confidence, as 211 (59%) of Conservative Party Members of the Parliament (MPs) renewed their confidence. Nevertheless, with 148 (41%) voting against Mr. Johnson, his leadership status in the party came out of the process damaged.