SVET Markets Weekly Update (July 31 — August 4, 2023)

05 Aug 2023 by rate3

On Week 31, Fitch downgraded the US credit rating, sending markets into correction mode. The Fed of Dallas’ Manufacturing Index rose, while the unemployment rate decreased.

Crypto News
On the crypto side, Grayscale reported that markets were recovering but warned of significant downside risks due to macro factors. Coinbase showed a 13% decline in revenue, and Gensler turned his attention to suppressing AI.

Macro News
Russia’s stock index soared on the back of a growing economy.
Ukraine’s current account switched to a surplus due to falling imports and increased exports.
The Mexican economy showed strong growth, driven by re-shoring and rapidly expanding auto exports.
The Brazilian central bank cut its interest rate, as it sees the local economy expanding and inflation subsiding.
The Central Bank of Egypt hiked its interest rate to a record high in an effort to curb galloping food and energy prices, which the Bank can’t control anyway, making business conditions in the country even more difficult to entrepreneurs.
In the commodities sector, rice prices are rising on expectations of drought in Thailand and India’s trade restrictions.

Overall, all major central bankers, except for the most intelligent ones, such as those in Japan and Brazil, continue to pursue an insane policy of sacrificing their local economic growth in favor of short-term political gains and the purely academic, illusory goal of “getting inflation under control.” Inflation in food and energy prices is not something that central banks can control by definition.

Meanwhile, the global economy continues to rebalance itself, even in the face of these bureaucrats, thanks to entrepreneurs who are taking advantage of current opportunities and temporary imbalances in some markets to boost internal production as, for example, in Mexico, New Zealand, and Brazil.

Stock and crypto markets, on the other hand, are entering a state of lethargic correction. This is due to a general oversold condition and a lack of growth impulses, as it is widely expected that the Fed will not begin to ease monetary policy until 2025.

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.

On Tuesday, Fitch lowered US rating but leaving markets unperturbed, PMI registered nine consecutive months of decline, job openings are at its lowest in 10 months, Nasdaq dipped a little on traders indecision, BTC continued to stagnate.

Details: The ISM Manufacturing PMI edged higher to 46.4 in July 2023, but below expectations. The ninth straight month of contraction in manufacturing activity (readings below 50) was driven by weak demand, slowing production, and ample supplier capacity. Prices fell at a slower pace, employment fell more, and supplier deliveries increased.

Job openings in the US fell to 9.582 million in June, the lowest since April 2021. Transportation, warehousing, and utilities, state and local government education, and federal government saw declines, while health care and social assistance and state and local government, excluding education, saw increases.

Macroeconomics

USA Rating: Fitch downgraded the US’s credit rating from AAA to AA+, citing concerns about the country’s fiscal health, citing “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” as well as “the repeated debt-limit political standoffs and last-minute resolutions”. Fitch expects government debt to rise to 6.3% of GDP in 2023. Agency also mentioned tightening credit conditions, weakening business investment and a slowdown in consumption potentially leading to a mild recession.

However, the downgrade was met with a muted (if any) reaction from the stock market. This is likely because investors have become increasingly skeptical of rating agencies’ credibility after 2007 financial debacle. Back then, several rating agencies gave AAA ratings to subprime mortgage securities that later turned out to be worthless.

Thailand: Country’s manufacturing PMI fell to 50.7 in July 2023, the softest in 11 months, as output rose the least since June 2022. The trade war between the United States and China is having a negative impact on Thailand’s manufacturing sector. Thailand is a major exporter to China, and the trade war has led to lower demand for Thai exports.

Myanmar: Country’s manufacturing PMI increased to 51.1 in July 2023, the sixth straight month of expansion, boosted by a continued rise in customer demand and output. Myanmar’s manufacturing sector is benefiting from a number of factors, including: strong economic growth, Myanmar’s economy is growing at a rapid pace; low labor costs, Myanmar has some of the lowest labor costs in the region; strategic location, Myanmar is located in a strategic location between China and India, and this makes it a good hub for manufacturing exports to both countries.

On Wednesday, NASDAQ reacted violently to Fitch’s decision, tumbling down by more than 2%. BTC, however, remained unperturbed above 29K. Other updates: Grayscale’s report pointed to macro risks for crypto; Stock markets are falling across the EU following the US lead; the Brazilian central bank cut its key interest rate further than expected.

Crypto

GrayScale reported that crypto markets have recovered, but macro factors could pose a risk. A soft landing for the US economy would support further gains, but a stumble or higher rates could pause the recovery.
A new amendment to the 2024 National Defense Authorization Act (NDAA) could introduce new KYC and AML measures for stablecoin issuers. This could pose compliance challenges for stablecoin issuers like Circle, which issues USDC.
Robinhood’s crypto-related transaction revenue decreased by 18% because fewer customers were making trades.
Stocks

Italy: Italian stocks fell 1.15% on Wednesday after Fitch downgraded the US government’s credit rating. The banking sector was among the biggest laggards. It shows how fundamentally flawed and unfair the contemporary, hyper-centralized financial system is.

Comments:

The question of why the Italian stock market is falling after the US credit rating downgrade has a distressing answer.

Fitch Ratings downgraded the US’s credit rating from AAA to AA+. This was the first time in 70 years that the US’s credit rating had been downgraded. The downgrade was due to concerns about the US’s budget deficit and debt levels.

There are a few reasons why Italian shares sank after the US credit rating was downgraded. First, investors became more risk-averse and stock markets around the world fell. Italian shares were particularly hard hit, as Italy is one of the countries that is most vulnerable to the European debt crisis.

Second, the downgrade increased concerns about the stability of the global financial system. This led to a flight to safety, as investors sold riskier assets, such as Italian shares, and bought safer assets, such as US Treasuries (zic!).

Finally, the downgrade made it more expensive for Italy to borrow money. This is because investors demand a higher risk premium when lending money to countries with lower credit ratings. This increase in borrowing costs could make it more difficult for Italy to finance its government debt, which could lead to a sovereign debt crisis.

So, as is currently the case in every country in the world, the poor pay for the wealthy’s debts and receive nothing in return but senseless political rhetoric. What can go wrong? :)

Macroeconomics

Brazil: The Brazilian central bank cut its key interest rate by 50 basis points to 13.25%, exceeding market expectations. The committee said that the easing cycle will depend on the evolution of inflationary dynamics.

Comment

The Brazilian central bank’s decision to cut interest rates is a significant departure from the policies of the Fed, which has been raising rates in an effort to combat inflation. The Fed’s policies have been criticized by most of independent economists, who argue that they are harming economic growth and leading to a recession.

The Brazilian central bank’s decision is a sign that some countries are willing to take a different approach to monetary policy. These countries are not willing to sacrifice economic growth in order to try to curb food and energy prices inflation, which is driven by factors outside of their control.

The Brazilian central bank’s decision is also a sign that these countries are starting to assert their independence from the US-led monetary system. They are no longer willing to follow the lead of the Fed.

The Brazilian central bank’s decision is a welcome development. It shows that there are other countries that are willing to take a more thoughtful approach to monetary policy. The Fed’s policies are suffocating economic growth and harming entrepreneurs. The Brazilian central bank’s decision is a step in the right direction.

Albania: The Bank of Albania held the key policy rate at 3% in August 2023. Inflation is expected to cool, but normalization is not ruled out amid persistent risks.

Comments

There are a few reasons why the inflation rate in Albania is so low after the war hit the EU in 2022, especially compared to neighboring more developed countries like Italy:

Albania is less dependent on foreign energy sources.** Albania is a small country with a relatively small population, and it produces a significant amount of its own energy from hydropower. This means that Albania is less exposed to the volatility of global energy prices than countries that rely on imported oil and gas.
Albania has a relatively small open economy. Albania’s trade-to-GDP ratio is about 60%, which is lower than the average for European countries. This means that Albania is less exposed to the global economic shocks that have driven up inflation in other countries.
Albania has a relatively low-wage economy. The average wage in Albania is about $500 per month, which is much lower than the average wage in developed countries. This means that Albanian consumers are less able to afford to spend on imported goods, which helps to keep inflation in check.
In addition to these factors, the Albanian government has also taken some steps to mitigate the impact of inflation. For example, the government has imposed price controls on some essential goods and services, and it has also provided subsidies to businesses to help them offset the rising cost of energy.
Commodities

Rice: Global rice prices are rising due to concerns over the global supply. Thailand is bracing for a potential drought next year (El Nino), and India has banned non-basmati white rice exports. This could lead to fluctuations in the global rice market and affect food security in poor nations.

On Thursday, PMI continued its downward move. Nasdaq hovered on yesterday’s lows, with PayPal and Qualcomm both tanking more than 10% on discouraging earnings. BTC is calm above 29K. Other news: Gensler warns about AI; Coinbase showed a decline in revenue; the Central Bank of Egypt raised its key rate to record highs.

Details: The ISM Services PMI fell to 52.7 in July, down from 53.9 in June. The slowdown was due to decelerating business activity, new orders, employment, and inventories. However, price pressures increased and backlog of orders rebounded.

Crypto

SEC chair Gary Gensler warns that mass automation in AI could have cascading implications for trillions of dollars in assets. He says AI’s predictive capabilities can help firms better serve their clients, but it could also be used to obscure responsibility when things go wrong. Does he now downplays SEC focus on cryptocurrency market?
Coinbase showed a 13% decline in revenue in Q2, sequentially. Still it exceeds estimates by showing $707.9m in revenue compared to $808.3m in 2022.
Macroeconomics

New Zealand: Country’s stock market fell for the fourth consecutive session on Friday, weighed by a downbeat session on Wall Street and cautious anticipation of US job data.

Comment

There are a few reasons why the New Zealand stock market has been among the best performers in the past 12 months despite China, its major trading partner, being in lock down.

Strong domestic economy: New Zealand’s economy has been performing well in recent months, with strong growth in both GDP and employment. This has led to increased investor confidence in the country’s economy.
Low interest rates: The Reserve Bank of New Zealand has kept interest rates low in recent months, which has made it attractive for investors to invest in New Zealand stocks.
Strong commodity prices: Commodity prices, such as dairy and meat, have been strong in recent months, which has benefited New Zealand companies that export these commodities.
Safe haven: New Zealand is seen as a safe haven investment, especially in times of global uncertainty. This has attracted investors to New Zealand stocks during periods of market volatility.
While China’s lockdown has had some negative impact on the New Zealand economy, it has not been as significant as some had feared. This is because New Zealand has a diversified economy and is not as reliant on China as some other countries. Additionally, the lockdown has led to an increase in demand for New Zealand’s exports, such as dairy and meat.

Egypt: The Central Bank of Egypt raised its key interest rate by 100 basis points to 19.25% in a surprise move to curb inflation, which increased to record 35.7% in June. The rate hike is the highest since 1992 and comes as inflation continues to rise. The bank said it will continue to monitor the situation and use all available tools to bring inflation down to its target of 7% .

Comment:

The Egyptian economy has been struggling for the past decade due to a number of factors, including:

Persistent trade deficit: Egypt has a chronic trade deficit, meaning that it imports more goods and services than it exports. This has led to a buildup of foreign debt, which has put a strain on the economy.
Overvalued currency: The Egyptian pound has been overvalued for many years, making it cheaper for foreigners to buy Egyptian goods and services. This has hurt domestic businesses and led to job losses.
Weak institutions: Egypt’s institutions, such as the judiciary and the bureaucracy, are weak and inefficient. This has made it difficult for the government to implement reforms and attract foreign investment.
Political instability: Egypt has experienced a number of political upheavals in recent years, including the 2011 Arab Spring uprising and the 2013 coup d’état. This has created uncertainty and made it difficult for businesses to plan for the future.
External shocks: Egypt has been hit by a number of external shocks in recent years, including the lock down and the war in Ukraine. These shocks have further weakened the economy and made it more difficult for Egypt to recover.
As a result of these factors, the Egyptian economy has been in a state of decline for the past decade. This has led to high unemployment, poverty, and inequality.

On Friday, the unemployment rate decreased. NASDAQ closed lower, dragged down by Apple’s quarterly results. BTC edged downwards a bit more in an attempt to break the 29K support level. Other: A poll showed that only 16% of Americans support CBDC; Auto exports from Mexico skyrocketed; PPI in Columbia’s mining sector fell sharply due to increased competition and high rates.

Details: The unemployment rate in the US fell to 3.5% in July, below market expectations. The number of unemployed people decreased by 116 thousand and employment levels rose by 268 thousand.

Comment:

The US labor market is a bit of a puzzle right now. On the one hand, we have a number of indicators that suggest that the economy is slowing down, including:

Falling corporate profits
Layoffs at tech companies
Declining PMI
Falling consumer confidence
On the other hand, the unemployment rate is still very low, and job growth is still happening. So why is this?

There are a few possible explanations. One is that the labor market is simply lagging behind the rest of the economy. It takes time for businesses to adjust to changes in the economic environment, and it’s possible that the labor market is still adjusting to the Fed’s rate hikes.

Another possibility is that the labor market is being supported by some temporary factors. For example, the government’s stimulus programs are still providing some support to the economy, and this may be helping to keep people employed.

It’s also possible that the labor market is simply more resilient than we thought. The US economy has a long history of creating jobs even during periods of economic slowdown, and it’s possible that this trend will continue.

Of course, it’s also possible that the labor market is about to change. If the economy continues to slow down, we may start to see a decline in job growth. However, for now, the labor market remains a bright spot in the US economy.

Here are some additional factors that may be contributing to the stubborn increase in US employment:

The strong demand for labor from businesses that are still expanding.
The tight labor market, which is making it difficult for businesses to find qualified workers.
The government’s efforts to support the labor market, such as the extension of unemployment benefits.
It’s important to note that the labor market is not immune to the economic slowdown. If the economy continues to slow down, we may start to see a decline in job growth.

Crypto

Report: Cato Institute poll, conducted in Mar — Feb 2023, found that most Americans (74%) oppose a central bank digital currency (CBDC) if it means the government could control how they spend their money. The poll also found that 68% of Americans oppose a CBDC if it means the government could track how they spend their money, and 59% oppose a CBDC if it would allow the state to freeze the bank accounts of American protesters. Only 16% of Americans support the issuance of a CBDC.

Macroeconomics

Mexico: Auto exports from Mexico hit a record high in July 2023, up 31% year-on-year. Ford, Nissan and Audi saw the biggest gains, while General Motors and KIA saw declines.

Comment:

It is possible that the sharp increase in auto exports from Mexico is due to reshoring, as auto corporations shift their production from sanctioned countries like Russia and from China to Mexico.

Russia was a major exporter of autos to the United States, but the country was sanctioned after its invasion of Ukraine. This led to a decrease in the supply of autos from Russia, which created an opportunity for Mexico to increase its exports.

China is also a major exporter of autos to the United States, but the country has been facing increasing trade tensions with the United States. This has led some auto corporations to consider reshoring their production to Mexico, where labor costs are lower and the regulatory environment is more favorable.

In addition to reshoring, the sharp increase in auto exports from Mexico could also be due to other factors, such as the strong demand for Mexican-made autos in the United States. The United States is Mexico’s largest trading partner, and the demand for Mexican-made autos has been increasing in recent years.

It is difficult to say definitively whether the sharp increase in auto exports from Mexico is due to reshoring. However, it is certainly a possibility, and it is one that will be worth monitoring in the coming months and years.

Additional factors contributing to the increase in auto exports from Mexico:

The United States-Mexico-Canada Agreement (USMCA), which went into effect in 2020, has made it easier for auto corporations to produce and export autos from Mexico to the United States.
The Mexican government has been investing in infrastructure and education in recent years, which has made Mexico a more attractive destination for auto investment.
The cost of labor in Mexico is lower than in the United States, which makes it an attractive location for auto production.
Overall, it is likely that a combination of factors is contributing to the increase in auto exports from Mexico. Reshoring is certainly a possibility, but it is not the only factor at play.

Columbia: Producer prices in Colombia fell by a record 6.55% in July from a year earlier, which, some say, is reflecting the central bank’s aggressive interest rate hikes. Prices in the mining and quarrying sector fell sharply, while prices in agriculture, livestock, forestry, hunting, and fishing rose at a slower pace. On a monthly basis, producers’ deflation was recorded at 0.74%, up from 2.71% in the previous month.

Comments: An alternative, more plausible explanation for the sharp price drop in the mining sector, rather than a rates policy, is the increased competition from other countries during times when demand for resources is slowing down across the world. Other countries, such as China, Peru, and Chile, are also world’s major miners. These countries are often able to extract resources more cheaply than Colombia, which puts intense pressure on prices locally.

Weeks 32: Next week, investors will be focused on a number of key economic releases, including the US inflation report (Thursday, August 10), producer prices, and the Michigan Consumer Sentiment (both on Friday, August 11). In addition to these US releases, investors will also be watching China’s inflation and trade data, GDP growth figures for the UK and the Philippines, an interest rate decision from the Reserve Bank of India, and inflation for Brazil and Mexico.