Over the past month, several new developments have impacted the global markets. Most significant in this month’s compilation includes gold surpassing the $2000/oz level, the banking crisis of 2023, China’s slow economic rebound and the biggest protests in the history of Israel.
Gold Price Outlook
Following a tumultuous month and the fears of a renewed banking crisis, gold broke through the $2000 barrier for the first time since the beginning of the pandemic. Though the ounce price has come down slightly to levels around $1970, the non-interest bearing metal remains very strong despite multiple assurances by central banks around the world to not lower interest rates until inflation is tamed.
As promised, the FED has raised its rates by 25 basis points to 5%, and has reassured the markets that they would continue to do so for as long as it was necessary. However, the markets were unconvinced that the FED can continue with its hawkish tone for much longer, especially following the collapse of several major banks. Currently, the US inflation figures are at around 6% as per February’s figures, while core inflation is hovering at 5.5%.
The ECB has also followed suit with a rise in interest rates by 50 basis points to 3%, still well below the current inflation figures released in March that came in at 7%. Due to a wide range of factors, the ECB has not been able to keep up with the FED’s more hawkish tone. Though now falling energy prices might help curtail European inflation somewhat as it has done this month with inflation recording a 1.5% fall from 8.5%. However, core inflation still rose from 5.6% last month to 5.7% in March, meaning that Europe’s fight is far from over.
Though it must be said that if either the FED or the ECB backtrack on their determination to get inflation back under control, all these harsh measures that have harmed growth will have been for nothing, therefore there is no meaningful indication that either central bank will back down until inflation is fully under control.
Source: Trading Economics
Euro Area Inflation Rate
The 2023 Banking Crisis
Following the downfall of the Silicon Valley Bank and two other US banks, fears were reignited over a threat of contagion of the wider global banking system. The US government quickly stepped into state that all of the deposits will be guaranteed in the case of a US bank’s failure. This has helped somewhat to calm investors, however the uncertainty drove many to invest in precious metals as part of a safe haven demand.
There are multiple causes for the failure of these banks, however one big reason has been the rapid rise of rates which have affected the value of older issues of US treasury bonds. SVB was forced to sell T-Bonds at a loss and declare said sales to the public, which caused a run on the bank resulting in its failure. The fall of SVB has left a large hole in regards to funding start-ups, and it remains to be seen whether other banks might face the same fate in the future.
As for Credit Suisse, its downfall began with an offbeat comment by the chair of the Saudi National Bank, the largest shareholder of Credit Suisse at the time, stating that they would not invest more into Credit Suisse. Despite the bank’s internal finances being far from strong, the fall of a 150 year bank certainly came as a shock to many. The bank’s clients started withdrawing their currency out at once, totaling above $35bn in just three days. In the end, the Swiss government urged UBS to takeover its local rival for approximately 3bn Swiss Francs, only a fraction of its asset value.
As previously mentioned, there were a variety of factors involved in the failure of these banks, however what can clearly be observed from the overarching rescue efforts of various governments is that too many banks have now really become “too big to fail”. By offering bailouts as such, governments might be averting a contagion in the short term, and therefore avoid a financial crisis for the time being. However in the longer term, with each new bailout the rot in the system deepens and the bubble continues to grow until it one day bursts spectacularly in a truly catastrophic crisis.
Source: Financial Times - Jefferies
China’s Economic Outlook and Slow Rebound
China has finally reopened to tourists as of March 2023, after almost 3 years of global isolation. However, the continuing real estate crisis among a few others has deeply affected China’s economic outlook as reflected by the posting of one of the lowest growth targets by the CCP in decades at 5%.
Following the aftershock of these major crises, namely the strict lockdowns and the crackdown on the real estate market (in which 70% of Chinese citizens’ wealth is tied), consumer confidence will likely take time to recover as was the case with the previous SARS outbreak back in 2003.
Israel’s Protests
This month Israel has been rocked by protests of an unprecedented scale in the country’s history. The Israeli Prime Minister Benjamin Netenyahu and the far-right coalition he is heading attempted to implement a highly controversial judicial reform that would significantly reduce the power of the courts. The reform would allow the parliament to appoint Supreme Court judges by a simple majority, therefore giving them control over the judiciary.
One of the most important reasons for the uproar against the reform is that it would in essence severely harm the notion of the separation of powers in Israel. All parts of Israeli society came to protest the government’s actions in the largest protests ever in the country where the nation came to a standstill. The biggest union in the nation and the president of the country both spoke out against the reform and urged the government to back down. Businesses and airports came to a halt, and the government eventually relented by at the very least delaying the reforms temporarily.
