By Elwin de Groot and Bas van Geffen of Rabobank
“If it looks like a duck, and quacks like a duck, we have at least to consider the possibility that we have a small aquatic bird of the family Anatidae on our hands” – Douglas Adams
There are several assets that may have managed to pass this duck test in more opportune market environments. However, the true test is usually when the sea is less smooth sailing. On 16 September 2008 the Reserve Primary Fund, a money market fund aimed at retail investors, saw its Net Asset Value fall to $0.97 a share, below the $1 value it was as supposed to have as a protective floor. It was a historic moment and the parting shot for significant outflows in money market funds and another lurch towards a long road of rebuilding trust.
For those who are in the business long enough, the current shockwaves reverberating through the crypto market may sound all too familiar. TerraUSD and other stablecoins made headlines this week and roiled cryptomarkets as they rapidly came under such pressure that their promised one- for-one pegs to the US dollar failed miserably. And since cryptos are not backed by underlying ‘traditional’ financial assets, unlike MMFs, the uncoupling with the dollar was even more volatile. In the end, the only buck that talks like a buck, holds value like a buck and trades like a buck is the US dollar.
Indeed, most other currencies were also struggling to keep up with the USD’s strength. EUR continued its slide and fell below 1.04, even though the list of ECB officials throwing their weight behind a July rate hike keeps growing with Peter Kazimir openly supporting such a move yesterday. Nonetheless, money markets lowered their rate hike expectations significantly, particularly for next year. It appears that stagnation concerns are currently outweighing inflation, with markets now doubting how long the ECB has before the policy tightening window closes – something we have been arguing for quite some time now.
Powell’s reaffirmation in a public radio interview yesterday that the Fed is likely to raise rates by a half percentage point at each of its next two meetings may not be feed for the hawks, but his acknowledgment that “[…] if you had perfect hindsight you’d go back and it probably would have been better for us to have raised rates a little sooner”, still backs those who believe the Fed is now more concerned with repairing past mistakes than the medium-term consequences of its actions.
A joint statement by the Finnish president and prime minister that the country should join NATO may also be weighing on EUR. In what seems to be a final bid to deter the applications, Russia has upped its threats that the country “will be forced to take retaliatory steps, both of a military-technical and other nature” if Finland joins the alliance. One of these other measures could be cutting the Nordic country off from Russian gas, which could happen as early as today according to Finnish newspapers. Although gas makes up for a relatively small share of Finland’s energy mix, it could hit some key industries, including a leading producer of packaging materials. This could have an economic impact extending far beyond Finland’s borders, especially in an environment where global supply chains are already stressed beyond breaking point.
Yesterday Germany accused Russia of using energy as a weapon. The country has come a long way from its “Wandel durch Handel” policy and strong support for Nordstream II, but the EU requiring unanimity for big decisions with a foreign policy element, such as sanctions, shows that its weight is not always enough to make quick decisions. Although the EU has vowed to implement a phased-in oil ban, preferably in the context of a broader sanctions package aimed at Russia, there are now Member States –according to Bloomberg news– that consider “delaying a push to ban Russian oil so they can proceed with the rest of a proposed sanctions package if the bloc can’t persuade Hungary to back the embargo.”
Such an oil embargo would likely push the Eurozone and most of its member states into a recession, as we discussed at length here. So some opposition and discussion about its details was always to be expected. But the risk of disentangling the oil ban and the other sanctions may extend those discussions about the details of the ban and thereby delay things further, sending a
signal of weakness. As such, it is no surprise that Russia seems to be taking the current window of opportunity to drive a further wedge between member states. We still assume (and believe), though, that the EU will eventually succeed in getting Hungary on board.
Meanwhile member states are stepping up measures to soften the huge impact of high energy costs on households – ranging from lower energy duties and taxes to lump-sum payments to households and businesses. In a latest attempt to mitigate the rise in energy bills, Spain and Portugal drafted a plan to cap the gas price per megawatt hour that feeds combined cycle and cogeneration plants. This will drive down the average price of electricity in the wholesale market, which in turn drives the price of regulated energy contracts. The plan has already been approved by Brussels and should be implemented in the countries “as soon as possible”. Our economist Maartje Wijffelaars thinks this could reduce Spanish inflation by as much as 1.4 percentage points in 2023 and provide a growth boost of several tenths of a percentage point. The key question, though, is the financing of these plans. Both countries have said they would do so in a budget neutral way, but that seems an utopian assumption.
Day ahead
Market participants will be watching whether the recent crypto turmoil feeds into other asset classes. Yesterday’s US market session did indicate that it may be too early to duck the ‘greenback’. The NASDAQ index, which has shown remarkable positive correlation with the crypto sell-off in recent weeks, managed to pare earlier losses and was even able to end the session on a slight positive note.
Which is not to say that Bitcoin losses aren’t painful for some; take El Salvador. As Bloomberg reports, the nation lost about $40 million with crypto since September, an amount almost equal to the next coupon payment on its foreign debt. But this –in our view– only highlights the risks of a strong dollar for emerging markets: the list of emerging market currencies that has not depreciated against the USD over the past month is scant.
In terms of economic data, it’s a quiet day. Industrial output in the Eurozone is expected to have declined sharply in March (-2% m/m expected), as materials shortages and high input costs bite, whilst demand, such as from China, likely weakened considerably during that month.
In the US, markets will be keeping an eye on the US’s import and export price data. These data underscore the contrast with Europe, which is really hit by a historic terms of trade shock. In the US, though, export prices are expected to have risen by 19.2% y/y in April, outstripping import prices by almost 7 percentage points! That, doesn’t mean that households aren’t feeling the pinch. Indeed, later in the day, the preliminary release of the Michigan Consumer Sentiment survey should shed more light on that question.
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