Monday's Markets Update (July 31, 2023)

31 Jul 2023 by rate3

On Monday, manufacturing in Texas improved, but was still in contraction. NASDAQ went dormant as investors awaited new macro-updates this week (PMI, jobs). Some of them were betting that the closure of the Powell interest rate hike campaign was close, while others waited for a spectacular crash to happen, as the economy started to crumble under the excessive Fed pressure on lending markets. Meanwhile, BTC prices continued to hover just above 29K, setting a record for being stuck at this level for so long.

Details: The Fed of Dallas' Manufacturing Index rose in July to -20, with most sub-indexes showing some improvement. Production remained relatively stable, indicating that the state's manufacturing sector is still in contraction. Labor market measures suggested faster growth in employment and longer workweeks, while inflationary pressures increased, but wage growth showed signs of moderation.

Crypto
Ron DeSantis, the Republican governor of Florida and a potential 2024 presidential candidate, said in New Hampshire that he would end the Biden administration's "war on bitcoin and cryptocurrencies.". It's nice to see a politician acknowledge the White House Administration's crusade against coins. Of course, we all know that politicians lie all the time, but the situation with political support for crypto is so desperate that we're glad to have even liars on our side.

Stocks
Russia: The ruble-based MOEX Russia index soared by 2.2% to close at 3,074 on Monday, the highest since the crash triggered by Russia's invasion of Ukraine in February 2022 and reaching its pre-enclosure levels. Sberbank and VTB shares surged more than 6% and 3%, respectively, on the back of strong profit growth and guidances. Rosseti and its local subsidiaries also saw their shares soar after posting strong profit growth. The rally in the MOEX Russia index is a sign that investors are becoming more optimistic about the Russian economy. However, the market remains volatile, and there is still a risk of further sanctions from the West.

Macroeconomics
Ukraine: Country's current account switched to a surplus of USD 0.120 billion in June 2023 from a deficit of USD 0.173 billion in the corresponding month of the previous year.

Commentary:
You might ask yourself, how it happened? This is the country in a bloodiest war since WW2. Ukraine is subsidized by EU and USA with its GDP shrunk 30%. How might it be that its current account is positive? Here are some explanations of this phenomenon giving the intricacies of contemporary inter-governments trade and accounting.

There are several objective reasons why Ukraine's current account switched to a surplus in June:

Imports have fallen sharply.The war has caused a sharp decline in imports into Ukraine, as businesses have been forced to close and consumers have cut back on spending. In June 2023, imports were down 60% compared to the same month in 2022.
Exports have increased. Despite the war, some Ukrainian businesses have been able to continue exporting their products. In June 2023, exports were up 10% compared to the same month in 2022.
Foreign aid has increased. USA and the EU have provided billions of dollars in aid to Ukraine since the start of the war. This aid has helped to offset the decline in imports and has boosted exports.
The combination of these factors has led to a current account surplus for Ukraine. However, it is important to note that this surplus is likely to be temporary. As the war drags on, imports are likely to start to recover, and exports may start to decline. This could lead to a current account deficit in the future.

Now, you might ask yourself: "I thought that US and EU foreign aid has also to be reflected on the current account, increasing the deficit. Is it not?"

That is correct. Foreign aid is typically recorded as a negative entry on the current account. However, there is a way to account for foreign aid in a way that does not distort the current account balance. This is done by treating foreign aid as a capital inflow, rather than a current account inflow. This means that the foreign aid would be recorded as a positive entry on the capital account, which would offset the negative entry on the current account.

The reason for doing this is that foreign aid is not really a trade transaction. It is a transfer of money from one government to another, and it does not represent a purchase of goods or services from the recipient country. Therefore, it is more accurate to treat foreign aid as a capital inflow, rather than a current account inflow.

In the case of Ukraine, the foreign aid that it has received from the United States and the European Union has been used to finance imports of essential goods and services. This has helped to offset the decline in imports that has been caused by the war. As a result, Ukraine has been able to maintain a current account surplus, even though it has received a significant amount of foreign aid.

Mexico: The Mexican economy continued its strong growth in the second quarter of 2023, expanding by 0.9% quarter-on-quarter. This was the seventh consecutive period of growth, and the best performance among North American economies. Growth was broad-based, with all sectors of the economy contributing. Services expanded by 1%, manufacturing by 0.8%, and primary industries by 0.8%. The strong growth is being driven by a number of factors, including strong domestic demand, low unemployment, and rising wages. The government's fiscal stimulus is also playing a role. Importantly, this growth occurred despite Banxico’s aggressive tightening, following Fed's "lead".

Commodities
Wheat: Wheat prices in the US have been volatile in recent weeks, as the war in Ukraine has disrupted global supply chains. Wheat futures touched a five-month high of $7.6 per bushel on July 26th, but they have since fallen sharply to $6.7 per bushel. The decline was driven by forecasts of rain in the Midwest and North Dakota, which eased concerns about crop damage as a result of the heatwave. The drop also outweighed the impact of Russia's shelling of grain infrastructure in Ukraine, which could have limited exports.