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LGT Navigator: Quickly back down to earth

June 28, 2022

Rising yields on the bond market and better-than-expected data from US industry quickly dashed vague hopes of a slower rate hike by the Fed. On Wall Street, optimism about a more cautious rate hiking path by the Fed evaporated again. Meanwhile, the G7 summit is ending and the implementation and impact of the ambitious plans, such as the USD 600 trillion infrastructure project or adherence to the targeted climate goals, remains difficult to assess at present.

Quickly back down to earth

On the New York stock market, indices at the start of the week were unable to build on last week's recovery and investor sentiment continues to be clouded by fears of recession and the prospect of rapidly rising interest rates. The Dow Jones Industrial closed -0.2% lower at 31'438.26 points and the S&P 500 declined -0.3% to 3'900.11 points. On the Nasdaq, the indices lost about -0.8%. Meanwhile, on the bond market, the yield of ten-year US government bonds climbed again to 3.2%.

The prospect of an unchanged sharp monetary policy tightening course of the Federal Reserve was strengthened by the latest economic data. Thus, orders for so-called durable goods in the US rose more strongly in May than analysts had expected. Orders increased by +0.7% for the month (consensus +0.2%). On a positive note, orders for capital goods excluding aircraft and military equipment rose by +0.5%. This figure is seen as an indicator of companies' propensity to invest. Another positive economic indicator was provided by pending home sales, which rose in May for the first time in half a year, by +0.7%.

In Asia, no clear trend is apparent on Tuesday. In Tokyo, the 225-value Nikkei index traded around +0.25% higher, while the Hang Seng index in Hong Kong lost about -0.9% and the Shanghai Composite remained virtually unchanged.

ECB interest rate decision half an hour later

The European Central Bank (ECB) announced that it will communicate its monetary policy decision half an hour later going forward. This means that the interest rate decision will be announced at 14:15 (CET) instead of the usual 13:45. The subsequent press conference will start slightly later at 14:45 instead of 14:30. However, the set dates for monetary policy decisions in the current year remain unchanged. The next interest rate decision – and most likely the first rate hike – is scheduled for July 21.

Gold market reacts calmly to planned G7 gold embargo

The momentum in the gold price was limited at the beginning of the week, after the G7 countries are considering an import ban on Russian gold. According to commodity experts, only a small part of Russian gold flows into the Western industrialized countries anyway. Because of the Ukraine war, gold imports from Russia are already severely restricted. China and India, however, as non-G7 members, remain important customers for the Kremlin.

Russia payment (in)ability in dispute

After a 30-day deadline to settle around EUR 95 billion in interest due on two government bonds denominated in foreign currency passed, fears intensified that Russia would be unable to meet its obligations. The Kremlin, however, rejected this and stressed that Russia was economically able and willing to service the maturing debt and had done so in the present case. However, the payment had been blocked by Euroclear because of the sanctions and “this is not our problem,” the Kremlin explained. Since the start of the Ukraine war on February 24, about half of Russia's gold and foreign exchange reserves, or about USD 300 billion, have been blocked by the West's sanctions. Since then, it has become increasingly difficult for Russia to maintain payments on outstanding bonds worth around USD 40 billion.

The rating agency Moody's has already confirmed a default by Russia. Specifically, it is about interest payments on two government bonds that have not been received by creditors even after a default period of 30 days has expired.

G7 to stick to climate targets

The seven leading economic powers (G7) want to stick to their climate protection targets despite the energy crisis resulting from the conflict with Russia. The final declaration of the G7 summit in Bavaria is expected to state that the 2015 Paris Agreement (limiting global warming to 1.5 degrees) will continue to be seen as a benchmark for G7 action. However, compliance is likely to be difficult, as Germany, for example, Europe's largest economy, is already having to ramp up its coal-fired power plants again to ensure energy security independently of Russian natural gas.

Economic Indicators June 28

MEZ Country Indicator Last period
08:45 FR Consumer Confidence (June) +86.0
10:00 EZ ECB President Lagarde speaks
15:00 US S&P/CaseShiller Housing Prices 20 biggest cities (April, y/y) +21.2%
16:00 US Consumer Confidence (June) 106.4

 

Earnings Calender June 28

Country Company Period
SWE H&M Q2

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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