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Week in Review: 7-11 August 2023

Summary and Comment


In July 2022, Ukraine and Russia made a deal that allowed the resumption of vital grain exports from Ukrainian Black Sea ports, easing a global food crisis sparked by the war. However, last month The grain deal expired (on 17 July 2023). Since then, Russia has launched a series of air attacks on Ukraine's ports, destroying an estimated 60,000 tonnes of grain.Russia’s and Ukraine’s bombing of each other’s ports could prevent crucial grain exports from reaching world markets, and lift food prices up again. Yet the attacks could also persuade the two enemy countries it’s in their mutual interest to strike a new grain deal. A lot will depend on whether the United States and Europe are ready to provide proper guarantees that Russian food exports can reach world markets. Allowing the Kremlin’s agriculture bank to reconnect with the SWIFT international payments system, as Putin has asked, would be a minor concession. Both Moscow and Kyiv know by now that protecting their vital grain exports is in both countries’ interest.

As part of the Arab–Israeli conflict, Saudi Arabia has not recognized Israel since the latter's independence in 1948. The official Saudi policy towards the Israeli–Palestinian conflict has been supportive of the Palestinian Arabs and against Israel. However, reports have surfaced in recent years indicating extensive behind-the-scenes cooperation in the areas of diplomacy, intelligence, and security. Warming relations between the two sides are a direct result of the Arab–Israeli alliance. This week, news surfaced that the US and Saudi Arabia continue to work on a framework aimed at Saudi recognition of Israel in exchange for US security guarantees for Riyadh — though the Biden administration signaled Wednesday there’s still a long way to go.

On Thursday, the Reserve Bank of India (RBI) kept interest rates unchanged for the third straight review,and asked lenders to set aside more cash as reserves to ensure surplus liquidity doesn’t stoke prices further.  It raised the inflation forecast for the financial year to 5.4%, from 5.1%, as vegetable prices could keep the headline figures high.

Exports from China slumped 14.5% YoY to a five-month low of USD 281.76 billion in July 2023, the steepest decline since February 2020, amid slowing global demand. Among major trade partners, exports to the US slumped by 23.1% from a year earlier. China's consumer prices dropped by 0.3% YoY in July, the first decrease since February 2021, compared to a flat reading last June.

The annual inflation rate in Germany was confirmed at 6.2% in July 2023, down from 6.4% in June, and remaining close to May’s 14-month low of 6.1%. The core rate (excludes food and energy) also eased to 5.5%, adding to signs that inflationary pressures in the country are starting to cool.

Annual inflation rate in the US accelerated to 3.2% in July 2023 from 3% in June, but below forecasts of 3.3%. It marks a halt in the 12 consecutive months of declines, due to base effects. Producer prices in the US rose 0.3% MoM, the biggest increase since January. It follows a downwardly revised flat reading in June. Services prices were up 0.5%, the largest rise since August 2022. Are inflation pressures going to increase in coming months due to recent oil and fuel price rises?

Regarding the financial markets, for the week, the main stock market indices are down, with the NASDAQ 100 losing 1.6 %, the S&P500 down 0.3%, and the RUSSEL 2000 down 1.7%. Gold and silver lost 1.5% and 4.0%, respectively. The barrel of WTI stabilized at ~83 USD, while natural gas rised (7.9%). Bitcoin remains stable at around ~29300 USD.

The relative strength of the US dollar rised 0.83%, and bond yields rised slightly on the long end (4.45% is the 20-year yield). The US bond yield is peaking at 5.48% in 4 to 6 months from now, and the 10-year yield now sits at 4.16 %. Overall, the yield curve remains inverted (a recession indicator).

We are observing a general pullback in the stock markets, coming from bullish weeks and overbought conditions. This seems to be a normal correction, and the upward rally might not have finished yet as the earnings season hasn't spooked investors so far. Let's carefully see how the market is getting positioned for the last quarter of the year. Important dates are the Jackson Hole Economic Symposium (Aug. 24-26) and the next FED meeting (September).

Sources:

https://en.wikipedia.org/wiki/Israel%E2%80%93Saudi_Arabia_relations

https://www.bloomberg.com/news/articles/2023-08-09/us-saudis-agree-to-broad-terms-for-israel-normalization-wsj-ll3rugt8#xj4y7vzkg

https://www.bbc.com/news/world-61759692

https://www.reuters.com/breakingviews/black-sea-wheat-war-is-sideshow-grain-deal-2023-08-09/

https://economictimes.indiatimes.com/epaper/delhicapital/2023/aug/11/et-front/rbi-holds-rates-ups-fy24-inflation-forecast-to-5-4/articleshow/102623634.cms

https://tradingeconomics.com/


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