monetary policy

Increasing variations in interest rates on government bonds the Eurozone have reawakened fears of bankruptcy in the periphery of the eurozone. The ECB says it will do everything it can to contain this threat of fragmentation. It remains uncertain though whether financial markets will continue to swallow the ECB’s narrative. These are painful times for bond investors, but there are opportunities.

The US central bank on Wednesday evening announced t that it would raise the benchmark interest rate by 75 basis points to cushion rising inflation. Earlier this week, the Fed already indicated to markets that it would do so. Economists and analysts last week were still expecting a 50 bp increase. The bigger-than-expected hike increases the chances of a recession in the United States.

The ECB has decided to raise interest rates for the first time in eleven years in an attempt to tackle persistent inflation. Asset purchases will also be halted from 1 July. The decision made in Amsterdam on Thursday marks the end of a long-standing period of monetary easing and negative interest rate policy.

The Japanese yen is rapidly losing its value against the dollar, increasing pressure  on the Japanese economy as well as the yen’s status as a safe haven. We investigated the Japanese enigma.

For the first time in twenty years, a dollar is worth 130 yen. Some currency specialists believe that in the short term 135 yen will have to be paid for a dollar. Mazen Issa, currency strategist at TD Securities, even sees an upward trend to 150.

While the Federal Reserve is expected to raise rates aggressively in the coming months, the European Central Bank, fearing the impact on Europe’s weaker economies, will remain reluctant to quickly boost Eurozone interest rates to mitigate the effects of rising prices. The ECB is due to provide a new monetary policy update on Thursday at its next six-week press conference.

While browsing through all the predictions for next year, I noticed that hardly anyone dares to put China on the map. Until I recently saw JP Morgan’s outlook with the appealing headline  “Buy everything in China”. This was followed on Tuesday by Goldman’s statement that all the risks in China have now been factored in.

Chinese President Xi Jinping, leader of the world’s largest CO2 emitter, is conspicuous by his absence at the COP26 climate summit in Glasgow. Critics consider the ‘unclear’ Chinese climate policy the nail in the coffin of the Paris Agreement. 

“There is a lot of uncertainty around inflation and monetary policy in the United States. This clouds the outlook for equity markets. In the long term, Asian equities offer the best investment opportunity.”

During question time after the Federal Open Market Committee (FOMC) rate decision, Jerome Powell made a very bold statement about monetary policy in the future. When asked when we should expect a less aggressive monetary policy, Powell replied that the economic recovery is far from complete (labour market and unemployment) and that we should not expect any monetary tightening before the end of 2023. 

While everyone is watching the main US stock indices break records day after day thanks to FAMANG stocks, the gold price also keeps creeping higher towards $1800 per ounce. Many investors remain sceptical, as they struggle to value gold. But there’s a lot to say for the gold rally to continue.