The Week in Review
Also available in video format: https://youtu.be/UWHyTvt-sdY
Earthquake in Turkey and Syria
The week started with terrible news A massive, deadly earthquake struck southern Turkey before dawn local time on Monday. The 7.8-magnitude quake has killed thousands of people in Turkey and neighboring Syria. It also triggered dozens of destructive aftershocks.
Turkey sits in an earthquake hot spot. Three tectonic plates — the Arabian, Anatolian and African plates — meet in this region, and as they slide past and squeeze against each other, they build up friction and stress that gets released as earthquakes.
The death toll is a result of several factors: the sheer size of the quake; the fact that it struck relatively close to the surface; and its proximity to where people live. Monday’s quake originated just about 11 miles below the surface. That means the seismic waves did not have to travel far before they reached buildings and people on the surface, leading to more intense shaking.
Sources:
https://www.msn.com/en-us/news/world/why-the-turkey-earthquake-was-so-deadly-according-to-science/ar-AA17b0xc?crc=true&cvid=9291ae4a464f478888971cf0f0ed6b24#image=1
https://www.reuters.com/world/middle-east/why-was-turkey-syria-earthquake-so-bad-2023-02-06/
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The 10th EU Sanctions Package to Russia
Diplomatic sources told Reuters that European Union countries are working on a 10th package of sanctions to take effect next month against Russia for waging war against Ukraine.
New sanctions should be ready around the anniversary of Russia's invasion of Ukraine (on February 24th), and could include the limiting of the nuclear fuel cooperation with Moscow, banning imports of Russian diamonds and reducing trade with Kremlin's ally Belarus.
EU officials are also seeking approval from the ministers for a seventh tranche of military aid for Ukraine worth 500 million euros.
Russian foreign ministry spokesperson Maria Zakharova commented on the latest round of sanctions, stating that “the current ‘package’ will have the same effect as all the previous ones – exacerbation of socio-economic problems in the European Union itself.”
Sources:
https://www.reuters.com/world/europe/eu-working-10th-round-russia-sanctions-diplomats-2023-01-20/
https://www.firstpost.com/world/eu-prepares-10th-package-of-sanctions-for-russia-kremlin-gears-up-for-offensive-12103042.html
https://www.mayerbrown.com/en/perspectives-events/publications/2022/12/russia-sanctions-eu-adopts-9th-sanctions-package
https://www.republicworld.com/world-news/russia-ukraine-crisis/russia-warns-eus-sanctions-on-moscow-could-backfire-and-cause-exacerbation-of-problems-articleshow.html
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In Germany: Climate Change vs Defense Projects
Germany is considering re-routing existing subsidies for eliminating coal-fired power plants to help defense manufacturers build new production facilities, according to people familiar with the matter.
The discussions between Germany’s federal government and regional states are aimed at providing the country’s armed forces with more weapons and ammunition and creating jobs in regions that are affected by the shift away from coal, said the people, who asked not to be identified as the talks are confidential.
Germany’s Bundeswehr has been suffering from outdated and partly dysfunctional equipment for years. Following Russia’s invasion of Ukraine the German government last year earmarked 100 billion euros in defense spending to expand and modernize its armed forces.
Furthermore, in September 2022 we watched Germany turning to its most reliable — and environmentally polluting — fossil fuel. At least 20 coal-fired power plants nationwide were resurrected or extended past their closing dates to ensure Germany has enough energy to get through the winter.
Sources:
https://news.yahoo.com/germany-studies-tapping-coal-exit-084115008.html
https://www.bloomberg.com/news/articles/2023-02-03/germany-studies-tapping-coal-exit-funds-for-defense-projects?srnd=europe-politics#xj4y7vzkg&leadSource=uverify%20wall
https://www.npr.org/2022/09/27/1124448463/germany-coal-energy-crisis
https://www.dw.com/en/l%C3%BCtzerath-how-germanys-energy-crisis-reignited-coal/a-64203214
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US Shot China High-Altitude Balloon
The U.S. military on past Saturday shot down a suspected Chinese spy balloon off the Carolina coast after it traversed sensitive military sites across North America. The balloon was shot down over water, to avoid risk to people on the ground. China insisted the flyover was an accident involving a civilian aircraft and threatened repercussions.
In its statement on Sunday, China’s Ministry of Foreign Affairs said that “China will resolutely uphold the relevant company’s legitimate rights and interests, and at the same time reserving the right to take further actions in response.” China criticized the U.S. for “an obvious overreaction and a serious violation of international practice.”
The presence of the balloon in the skies above the U.S. this week dealt a severe blow to already strained U.S.-Chinese relations that have been in a downward spiral for years. It prompted Secretary of State Antony Blinken to abruptly cancel a high-stakes Beijing trip aimed at easing tensions.
Source:
https://fox8.com/news/china-calls-us-shooting-balloon-serious-violation-of-international-practice/
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On The Economic Front
Economic Data Source: Trading Economics
Australia Interest Rate
The Reserve Bank of Australia raised the cash rate by 25bps to 3.35% at its February meeting, matching market forecasts. Tuesday's move was the ninth rate hike since May last year, which brought borrowing costs to a level last seen in September 2012. Policymakers mentioned they would keep the economy on an even keel since the way to achieve a soft landing is a narrow one. The committee forecast Australia's GDP growth to average around 1% in 2023 and 2024 after expanding largely in 2022.
Canada Unemployment Rate
The unemployment rate in Canada held steady at 5% in January of 2023, just shy of the record-low 4.9% observed in June and July 2022. The number came below market forecasts of 5.1%, signalling that the Canadian labor market remains tight. An additional 153 thousand people joined the labour force, boosting the participation rate to 65.7%.
United Kingdom GDP Growth Rate
The British economy stalled in the last quarter of 2022, following a downwardly revised 0.2% fall in the previous period. Figures came in line with market expectations. Exports declined 1%, while imports were up 1.5%. Figures also showed businesses were de-stocking their levels of inventories in the final quarter of the year. The level of quarterly GDP is now 0.8% below its pre-coronavirus level. Considering full 2022, the British economy expanded 4%, following a 7.6% increase in 2021.
United States Balance of Trade
The trade deficit in the US widened to $67.4 billion in December 2022 from $61 billion in November. Considering the full 2022, the US trade deficit went up to a record high of $948.1 billion, equivalent to 3.7% of the GDP from $845 billion in 2021, as rising inflation, high energy prices and robust demand pushed imports to the highest level ever. The goods gap widened by 9.3%. Exports of goods increased 17.7% to $2,085.6 billion and imports jumped 16.3% to $3,277.3 billion, both led by crude oil. The deficit with China widened to $382.9 billion and the one with Canada to $81.6 billion.
United States Michigan Consumer Sentiment
The University of Michigan consumer sentiment for the US jumped to a thirteen-month high of 66.4 in February of 2023. The gauge for current economic conditions improved to 72.6 from 68.4 in the previous month, but the expectations subindex fell to 62.3 from 62.7. After three consecutive months of increases, sentiment is now 6% above a year ago but still 14% below two years ago, prior to the current inflationary episode. Meanwhile, inflation expectations for the year ahead went up to 4.2% from 3.9% while the five-year outlook remained steady at 2.9%. Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978. Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead.
A Walk Around the Markets
The Dow Jones finished 0.5% higher after added more than 160 on Friday, the S&P 500 edged up 0.2%, while Nasdaq 100 closed 0.6% in the negative territory. Investors digested the most recent economic data and comments from Federal Reserve speakers after hawkish remarks from Federal Reserve officials that brought down the hope of a pause in rate hikes. Meantime, the University of Michigan Index of Consumer Sentiment rose in February but still, it showed short-term inflation expectations have risen. On the corporate front, Lyft plunged 36% as its earnings result missed expectations, and following the announcement of price cuts. Expedia shares fell 8.5% after a disappointing quarterly report. For the week, the Dow was up 0.2%, while the S&P 500 dropped 0.6% and Nasdaq 100 fell almost 1.8% and booked the worst week since December.
The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, topped 3.7%, a level not seen in more than a month, as investors adjust their portfolios for a higher terminal rate. Richmond Federal Reserve president Thomas Barkin was among the latest officials to acknowledge that the US economy is slowing but warning that it is fundamental to continue hiking to ensure inflation doesn't get entrenched. Investors now see the Fed raising the fed funds rate to 5%-5.25%, with the world's most influential central bank delivering a 25 bps hike in March and May before pausing. Looking ahead, Wall Street and the Fed are again in a standoff on the future path of interest rates, with the former betting on a rate cut later this year while the latter reaffirmed its view that interest rates will stay higher for longer. The US yield curve remains inverted.
US Yield Curve
Source: https://www.ustreasuryyieldcurve.com/
Source: Trading Economics
Spot silver rose back to above $22.4 per ounce after touching $22.03 on Tuesday, its lowest level since early December. Recession concerns could pressure prices, as investors worry about low demand for the metal as an industrial input for goods with high electricity conduction needs, which is reflected in its sharp underperformance to gold in January.
Source: Goldmoney, Alasdair Macleod
Comex’s Open Interest in both metals is low, indicating that they are oversold. Clearly, downside from here in the gold price appears limited.
In both the US’s CFTC and Euronext, regulated futures exchanges in western capital markets are being attacked by a Russian affiliated ransomware organisation. Besides obtaining ransoms from ION, LockBit now possesses and possibly has continuing access to vital data which at any time they can attack or compromise. There can be little doubt that this represents intelligence valuable to the Russian government, particularly with respect to oil and gas contracts.
We are approaching the time when a new phase of the Ukraine war is about to kick off, with tank numbers building up. It’s not for nothing that Zelenskyy has been touring Europe with demands for yet more weaponry.
At this time last year, gold began a rapid rise to $2070 and oil traded up from $85 to $120 when Russia attacked. It is amazing that markets are ignoring the very clear signals that the conditions which led to commodity and energy prices soaring last February are in place to happen again. This time, will gold break out above its all-time highs?
Opinion Section
Upcoming
Next week, in the US, the economic calendar will be dominated by the inflation rate, producer prices, retail sales, and several speeches by Fed officials. Also, CPI, retail sales, and labour data will be released in the UK. Elsewhere, investors will follow Q4 GDP growth rates for Japan, Thailand, and the Netherlands; fresh inflation rates for India, Switzerland, and South Africa; and interest rate decisions in the Philippines and Indonesia.
Have a nice week.
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