RBA’s Interest Rates Hike Hasn’t Impacted the AUD

The Reserve Bank of Australia met for its final meeting of the year today to set its monetary policy for the coming period. Once again, as expected, the decision was passed to increase the official cash rate (OCR) for the eighth straight meeting. This time, it was just a 25 basis point jump, but for a year that was originally predicted by the RBA to maintain its low rates, it puts the total at 300 basis points worth of increases up to 3.10%.

It’s also the highest the cash rate has been since November 2012, but around the world, there are many examples of tight monetary policy in the midst of high inflation. The Federal Reserve is already sitting at 4.00%, the Bank of Canada is at 3.75% with forecasts for another 50 basis points move tomorrow. The European Central Bank and the Bank of England are lagging behind, but gaining, at 2.00% and 3.00% respectively, but have more to consider with respect to the energy crisis affecting their economies.

The AUD/USD Barely Reacted to the RBA’s Monetary Decision on Interest Rates

The AUD barely reacted to the RBA monetary policy decision during the Asian and European trading sessions, only up 0.43% against the USD at the time of writing.

The AUD/USD pair is currently sitting below the 0.382 Fibonacci retracement of the bearish movement that occurred between April 5th 2022 (around 0.7576 closing price of the peak of the year) and mid-October 2022 (lowest level of the year at around 0.6200). The Relative Strength Index (RSI) is slightly above its neutral level of 50, but exhibits no clear direction.

The ActivTrades market sentiment indicator shows that its community of traders isn’t too sure about what the next move of the currency pair will be, as 51% of all traders are buyers and 49% are sellers. Next week’s Fed meeting might provide a clearer indication of the trajectory of the currency pair.

Daily AUD/USD chart – Source: ActivTrader online trading platform

The Christmas Gift No-one Wanted

According to Ratecity, homeowners with a $500,000 mortgage and 25 years left to go on their loan, at the average owner-occupier variable rate of 2.86% in April, may see their monthly payments rise by $834 as a result of this year’s interest rate increases.

The statement spoke of the “lag” with how monetary policy operates, touching on the fact that many would-be yet to feel the full effects of the increases due to the fixed portions of their loans. Something of a “mortgage cliff” is imminent though, according to a recent article in The Guardian, with at least $270 billion of home debt leaving the record low fixed interest rates that were snapped up during the pandemic.

Having said that, the stats are not all bad. According to data from the Commonwealth Bank, 78% of homeowners who took out a loan are ahead on their payments and 1 in 3 customers are two years ahead.

The problem is that there is also 26% who are less than three months ahead – a cushion that may be swiftly lost with rates increasing. There is now $64 billion in offset accounts belonging to CBA mortgage borrowers, an increase of $19 billion over the balances prior to the COVID-19 outbreak.

The Key Drivers of Rate Rises

Despite having dipped slightly at the end of November to 6.9% from 7.4% the previous month, Australia’s annual CPI is expected by the RBA to hit 8% at the close of the year and then start to decline from there. It’s not until 2024 that the central bank expects inflation to get down to around the 3% mark, which is still above their 2% mandate. Given the forecasts, it’s difficult to see how the recent course of the Australian cash rate will shift much in the near future.

Governor Lowe’s statement indicated that the Australian economy was showing no signs of slowing down. As the global economy weakens, the rebound in spending on services levels off, and household consumption growth slows owing to tighter financial circumstances. The bank predicts modest economic growth for the next year, and in 2023 and 2024, growth of around 1.5% is expected.

In spite of recent improvements, the labor market is still very competitive. For the first time since 1974, October saw a decrease in the unemployment rate, which hit 3.4%. Both the number of open positions and the number of advertisements for such positions are quite high, but somewhat decreasing.

What Should Investors Expect From Now?

The RBA board forecasts that there will be further rate hikes in the months ahead, but the committee is not following a predetermined path. Many will breathe a sigh of relief that the next meeting, barring unforeseen circumstances, is not due until the 7th of February next year.

In the meantime, the central bank will be keeping a careful eye on the state of the international economy, as well as consumer spending, wage trends, and price formation in the country.

Before today’s decision on the interest rate, the comparison website Finder polled 40 industry professionals and economists, and 83% of those respondents indicated they anticipated that the cash rate would reach its highest point somewhere in the range of 3.25 percent to 4%.

When asked about when the rates would reach their highest point, 85% of those who took part in the study said that it would happen within the next year, with March (17%) and June (17%) emerging as the months in which it was most likely to take place.

Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

Is Target a Buy After the Recent Dip?

As revenues dropped by almost 50% year over year. Concerns about the “rapidly evolving consumer environment” were raised, since they pose a threat to future growth. The company’s stock price fell as much as 15% on the day of publishing its earnings last week and ended the same week almost 5% down.

Target Daily Chart – Source: ActivTrades online trading platform

In its statement, the CEO said that profits had gone soft, particularly during the last weeks of the third quarter, citing the impacts of inflation, economic uncertainty, and rapidly rising interest rates that are biting into consumers’ purchasing power and changing buying habits.

With a worldwide slow-down on the horizon and its share price crumbling, is the big box chain capable of bouncing back and rewarding patient investors?

Q3 In a Nutshell

Compared to last year, total revenue grew by 3.4% to $26.5 billion. Operating income was $1 billion in the third quarter of 2022, which was 49.2% less than it was in the third quarter of 2021, at around $2 billion. This was mostly due to a drop in the company’s gross margin rate. Earnings per share also came in at $1.54, well below the $2.13 target.

It wasn’t all bad news, as the company did see improvements in areas like beauty, food, and home staples, but persistent weakness in discretionary categories was a drag on the bottom line. Even while Target has made some headway in reducing the surplus of inventory it built up in the first half of the year, analysts still see the store’s wide product offering as a weakness.

Further highlighting Target’s difficulties, last Wednesday, we also learnt that October retail sales in the United States increased by 1.3%. This was the largest growth in retail sales in eight months, and it beat the gain forecast by analysts by 0.2 percentage points.

The Q4 Forecast and Beyond

In view of the deteriorating business climate, the company has reduced its fourth-quarter revenue and profit projections to an operating margin rate of around 3%.

It also has plans to launch a company-wide drive to streamline and improve operations in order to save between $2 and $3 billion over the next three years. Although they didn’t specifically explain how, the extra 40% of growth that took place over the pandemic is part of how they expect to leverage for improvements in how they operate.

Management cautioned that fourth-quarter same-store sales are anticipated to fall, which is one of the most important metrics in the retail business. This equates to the total revenue generated by a company’s locations that have been operating for at least a year.

Target’s share price has already dropped by one-third this year, causing some in the industry to refer to the company as a bit of a bargain.

It’s understandable if prospective investors are hesitant to purchase the company’s stock given the three straight quarters of disappointing profitability and a gloomy prognosis for the Christmas shopping season. However, some feel that Target stock is a good buy-on-the-dip choice. Investors who are patient and willing to wait might benefit from seeing how the current quarter (or two) plays out for the company.

How Are Other Retailers Fairing?

Walmart

In contrast to Target, Walmart surprised investors last Tuesday by reporting quarterly earnings that were higher than anticipated, with particular success at Walmart US, Sam’s Club US, Flipkart, and Walmex. The company in response raised its fourth-quarter forecast and announced a fresh $20 billion share buyback program.

Overall revenue was $152.8 billion, representing an increase of 8.7% (or 9.8% when measured in constant currency).

The impact of currency changes had a negative effect of $1.5 billion on Walmart International’s net sales, which came in at $25.3 billion. This number still represents an increase of $1.7 billion, or a 7.1% increase. Earnings per share came in at $1.50 adjusted, well above the $1.32 forecast.

Walmart’s Christmas expectations were more muted than in previous years. The company forecasted a 3% increase in comparable sales for its US operations, excluding the impact of fuel sales.

The company last week also announced it was agreeing to a multi-billion dollar settlement for lawsuits in regards to its pharmacies and the opioid crisis in the US. The $3.1 billion payment was in response to allegations of improperly filled prescriptions for the highly addictive painkillers. Walmart in its statement denied any liability and strongly disputed all claims.

Walmart Daily Chart – Source: ActivTrades online trading platform

Dollar Tree

As customers continue to downshift to the bargain retail industry in the face of increasing inflation and uncertain economic outlook, Dollar Tree reported Tuesday better-than-expected profitability for the third quarter and increased its full-year sales prediction.

Total net sales rose by 8.1% to $6.94 billion. Same-store sales for Enterprise went up by 6.5%. The company’s same-store sales went up 8.6%, or 8.5% when currency changes were taken into account. This was due to a double-digit increase in the average ticket, which was partially offset by a drop in traffic.

Despite the positive results, however, the group’s prediction that diluted profits would be in the “lower half” of its earlier prediction of between $7.10 and $7.40 per share caused shares to fall sharply after the results were published.

Dollar Tree Daily Chart – Source: ActivTrades online trading platform

Charts provided by ActivTrades online trading platform

Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

Twitter in Tatters – What’s Next for the Social Media Platform?

With each week that passes, the situation appears more cringeworthy and many are talking more about ‘when’ Twitter will fail rather than ‘if.’

With a global downturn on the horizon and many of the big tech firms laying off workers left and right, how can a company like Twitter pivot from this messy year of legal battles, political upheaval, whispers of bankruptcy, and fleeing advertisers?

Last Week

Musk on the 16th of November asked via email that his remaining staff either commit to long hours and being ‘extremely hardcore’ or take a severance package of three months’ wages. It seems that many weren’t willing to match the work ethic of their new CEO, who is known for putting in some ridiculously long days at work himself.

Recently in November, at a conference held by Baron Capital Group, he commented onstage that his own workload had increased from around 70 to 80 hours up to nearly 120. “Go to sleep, I wake up, work, go to sleep, work, do that seven days a week,” he said. If that’s what Musk means by ‘extremely hardcore’ it’s not hard to imagine why so many Twitter staff have since pulled the pin.

It seems like the worst conceivable moment for Musk to issue his ultimatum too, as the 2022 FIFA World Cup began over the weekend, which has always been an event that creates the most worldwide traffic to the site. Even under ideal conditions, the World Cup presents a significant challenge to the platform, necessitating close coordination between members of the site-reliability-engineering team to guarantee that mission-critical services continue to function.

The Guardian reported that the platform was already failing to remove the vast majority of severely racist tweets about indigenous players in the lead-up, sparking concerns about abuse.

Active Platform Under Construction

Twitter has never been a very profitable company, but lately, the company is said to be losing something like 4 million dollars a day. Money needs to start coming in as soon as possible for the platform to stay afloat, and the latest flop with the subscription service hasn’t helped. The service, known as Twitter Blue, was dumped after impersonators took advantage of an opportunity to become “certified” by only paying $8 per month for the privilege.

Musk made an effort to persuade major advertisers that his messy acquisition of Twitter wouldn’t have an adverse effect on their brands. He admitted that certain “dumb things” may occur as he was working to improve and secure the user experience. Musk, though, assured that these experimentation would not damage the brands’ reputations.

Eli Lilly, the global pharmaceutical company, will be one such brand that will strongly disagree. A fake account claimed in a tweet that insulin was now free for customers, which caused the stock price to temporarily tumble, and the company was forced to defend itself.

Musk has ruthlessly eliminated teams that deal with Twitter’s complicated legal and privacy regulations and the enforcement of those policies, as well as technical workers with vital institutional expertise. In addition to stopping new code from being deployed, he also plans to cut off Twitter’s microservices.

Earlier this month, Musk warned that the business could soon go under, saying that without an increase in subscription money, it would not be able to withstand the next economic downturn.

90% of Twitter’s annual revenue of $5.1 billion (£4.3 billion) comes from advertising, albeit this revenue stream has been significantly impacted by a decline in expenditure by important clients such as General Motors.

Musk said categorically after the purchase that there had been a “dramatic drop” in the revenue generated by adverts.

A Management Style that Might Need Work?

It is well known that Elon Musk has a reputation for being a somewhat brash and demanding boss of SpaceX and Tesla, he tends to place the utmost weight on the quality of the product.

Regardless of whether the workers who are developing the goods agree with how he intends to reach his goals or the goals themselves, they are often expected to go above and beyond to achieve success. Some have even reported having slept on the floor of their offices to meet their deadlines.

Ex-employees of Tesla have said that Musk is only interested in the company’s bottom line, and that settling disputes with the billionaire is impossible without first establishing a level of trust. One former Tesla employee noted that working long hours is inevitable, therefore individuals must evaluate whether or not they can maintain such a schedule.

Surely having requirements of his employees like these will not bode well for rebuilding the company, especially since they will really need to hit the ground running to regain the trust of their users and advertisers before they flee to alternative social media platforms.

Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

Layoffs in the Tech Industry on the Rise

Big Tech firms have dominated the US economy for the last decade. Apple, Amazon, Alphabet, and Microsoft have all surpassed the trillion-dollar value threshold, making them some of the most valuable companies in modern history.

However, during the last 12 months, cracks have started to appear in that domination. Industry leaders started issuing cutback warnings, and companies like Google, Microsoft, and Facebook implemented hiring freezes on the down low. The companies also issued conflicting signals during the summer, as economic confidence fluctuated between positive and negative.

Even further alarm has been raised in recent weeks as a wave of earnings announcements revealed that even the most enduring corporations are having significant difficulty maintaining the revenue growth they were able to display over the last few years.

Right now in response, across Silicon Valley and around the world, big tech companies are reducing their workforces in an effort to save expenses in preparation for a worldwide economic downturn.

Most of them are struggling with the same issues.

They grew too fast, inflation is too high, interest rates are rising, clients are low on purchasing power, borrowing to expand is more expensive, the strong dollar is eroding their profit margins, too many people were hired during the pandemic, supply chains were disruptive, and now growing recession fears.

Some in the industry are likening the recent activity to the dot.com crash from 20-odd years ago. Many are at least calling it the end of an era. Regardless, there will be plenty of talent looking for jobs in the near future, and it could just be the beginning.

Let’s take a look at just a few company examples that have been making the news over the last weeks.

Twitter

Elon Musk’s acquisition of Twitter hasn’t exactly been smooth sailing. Concerns about less moderating, fleeing advertisers, and threats to place the whole site behind a paywall followed the takeover, which was eventually achieved via a drawn-out litigation process.

Since then, it’s reportedly been losing millions of dollars a day and has been delisted from the New York Stock Exchange.

One week after taking control, on November 3rd, news sites began reporting that Musk wanted to lay off half of Twitter’s 7,500 employees.

Former Twitter CEO, CFO, director of legal policy and safety, and chief marketing officer were among those who were terminated from their jobs. Twitter’s senior privacy, security, and compliance executives have also just recently left the company.

Up to this point, Twitter has had to lay off approximately 3,700 of its staff.

Meta

This week, Facebook CEO Mark Zuckerberg said that the company’s parent company, Meta, will be laying off 11,000 workers, or 13% of its worldwide workforce. This comes as the company this year so far has seen its share price plummet by nearly 70%.

In the third quarter, Meta’s revenue was down 4% year over year to $22.1 billion, while costs and expenditures increased 19%. In contrast to the previous year, operating income fell 46% to $5.66 billion. Net income for the three months of Q3 was $4.4 billion, down 52% from the previous year’s $9.8 billion.

Zuckerberg owned up to the layoffs in a statement released by Meta, saying that he built the company too big and too quickly. He stated that he was misled by the sudden boom brought on by the pandemic and that he expected it to continue long after the outbreak.

He responded to the trend by increasing his workforce significantly. Ad spending has been falling, and Apple’s privacy update has gone into effect, so the company’s income can’t sustain the same investment in expansion and employees it had planned for before.

He went on to say that Meta would be taking “steps to become a leaner and more efficient company” Among these measures include cutting down on team budgets, eliminating perks, giving up certain office leases, and “extending our hiring freeze through Q1.”

Meta weekly chart – Source: ActivTrader platform from ActivTrades

Amazon

With online sales slowing, Amazon has seen its share price drop by more than 40% this year. This week, it was reported by The New York Times that the business intends to shed 10,000 employees, or around 3% of its workforce.

According to its Q3 earnings, the company reported that it had actually fared quite well compared to many of its tech peers, but was still below market expectations. Net sales in the third quarter were $127.1 billion, up 19% year over year.

The company hired thousands of new staff during the boom times of the pandemic, but is now having to come to terms with slowing demand. Recently they implemented a hiring freeze while stopping some of its warehouse expansions. Additionally, the company had stopped working on concepts like a robot that would deliver packages personally.

Jeff Bezos, the founder and CEO of Amazon, issued a warning last month, stating that the US economy was telling people to “batten down the hatches.”

Amazon weekly chart – Source: Online trading platform from ActivTrades

Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

European Commission: EU at a Turning Point With Inflation Far From Its Peak

According to the most recent statistics, Paolo Gentiloni, the EU’s Commissioner for Economy, told reporters in Brussels that “the EU economy is at a turning point.” He also said that current forecasts projected a drop for the winter and that the EU economy “lost momentum in the third quarter.”

The Commission predicted that the economy would fall in the last quarter of this year and continue to contract in the first three months of 2023, mostly as a consequence of the rise in energy prices brought on by the conflict in Ukraine.

Inflation, GDP, and Employment

Officials from the European Union in Brussels increased all of their expectations for consumer prices while slashing their predictions for growth in the next year, forecasting almost no expansion. They predict that the economy is already declining and will continue to do so in the first quarter of 2023.

According to the European commission, overall inflation will be 9.3% in the EU and 8.5% in the euro area this year, and it will only slightly decline to 7% and 6.1%, respectively, in 2023.

In October, annual inflation in the eurozone hit a record 10.7%. According to Eurostat, both the EU and the euro area’s seasonally adjusted gross domestic product (GDP) rose in the third quarter compared to the second quarter by 0.2%.

One traditional definition of a recession is two consecutive quarters of declining production, but the economists on the eurozone business cycle dating committee utilize a wider range of information, employment statistics are one such additional example.

The EU commission expected a rise in the unemployment rate from 6.8% this year to 7.2% next year and a fall to 7% in 2024, indicating that the labor market was expected to hold up quite well despite declining production during the winter.

According to Gentiloni, the forecasts are susceptible to risks from unforeseen circumstances like a full shutdown of any remaining Russian gas, but if EU countries work together to address the economy and the energy problem, the economy may perform better than projected. He referenced a debate over updating EU regulations aimed at reducing excessive deficits and debt.

The Energy Crisis

As a result of Russia’s reduction in gas supplies to Europe, which is utilized for heating, power, and industrial activities, natural gas, and energy prices have skyrocketed.

Government-owned gas provider Gazprom has cited technical considerations and certain customers’ unwillingness to pay for gas in roubles, despite accusations from European officials that Russia is engaging in energy warfare to punish EU nations for backing Ukraine.

In response, EU nations have set up additional supplies of natural gas via pipelines from Norway and Azerbaijan, as well as in a liquefied form that arrives by ship from the US and other countries. They have also offered monetary assistance to customers facing increased costs.

Germany, the biggest economy in Europe and one of the most reliant on Russian natural gas before the crisis in Ukraine, is predicted to have the poorest performance in 2023. Over the next year, it was anticipated that production in Germany would decline by 0.6%.

Will the EU Inflation Figures Follow US Trends?

When the global inflation crisis began to unfold a year ago, it was generally speculated that it would be more likely to persist in the United States than in Europe, since the US had a far larger stimulus program in place and higher levels of consumer demand. However, the oil and gas crisis in Europe has ultimately thrown that image out the window.

Following months of stubbornly persistent interest rate hikes from the Federal Reserve, fresh economic statistics published on Thursday last week indicated that inflation in the US slowed more than anticipated in October. This was good news for American consumers as well as for the Federal Reserve and the White House.

While many homeowners continue to struggle with severe inflation, it is now starting to show indications of improvement. In the year through October, the Consumer Price Index (CPI) increased by 7.7% less than the 7.9% that experts had predicted, and less than the 8.2% that it had increased by in the year through September.

After excluding the volatile expenses of food and fuel, prices increased by 6.3% annually, down from 6.6% in the previous report. Additionally, the core inflation gauge had its steepest monthly decline in more than a year.

The analysis offers preliminary indications that the Fed’s initiative to curb inflation may be easing pricing pressures amid recent supply chain repair. The central bank has increased interest rates this year from below zero to almost 4% in an effort to reduce consumer and corporate demand and allow supply to catch up.

The announcement caused stocks to soar as investors saw it as a warning that Fed policymakers could hike rates more gradually and cause less economic harm in their effort to control inflation.

The regulated CFD broker ActivTrades expects market volatility to remain high, especially on European markets, as traders will carefully monitor CPI figures for the Euro Zone. Other CPI data will also be published this week like in Canada, in England, and in Japan, which might keep boosting the global stock market if data is lower-than-expected.

Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

UK’s Rishi Sunak to Scrap Truss Growth Plan and Focus on More Taxes Instead

Truss, who spent all of 50 days in office, pulled the pin after her mini-budget was met with serious market turmoil and criticism for not having a sound explanation for how it would be funded. The situation was so severe that the Bank of England was forced to intervene to stabilize bond markets and save a number of pension funds from going bust.

“We set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit,” she said in her resignation speech outside number 10 Downing st, “I recognise, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative party.”

With the shortest-serving Prime Minister’s term having quickly gone up in flames, so too, for the moment, have Britain’s plans for pursuing growth.

Introducing Rishi Sunak

Let’s begin with the basics. Rishi Sunak is a 42-year-old Conservative MP. He entered the House of Commons as a member of the Tories’ 2015 parliamentary intake, representing the Richmond seat in North Yorkshire.

Sunak will be the first British-Asian prime minister of the United Kingdom, and is a proud Hindu.

He was raised by his parents, Yashvir and Usha Sunak, in Southampton, a small port city on the south coast of England. He attended Winchester College, a highly prestigious, fee-paying school, where he served as head boy. Before entering politics, he worked for a few hedge firms, most notably Goldman Sachs.

Sunak is married to Akshata Murty, who he met while studying for his MBA in the US. She is co-founder of the tech company, Infosys, and the daughter of Indian billionaire N. R. Narayana Murty.

Murty receives a portion of her income from shares in Infosys, and earlier this year, considerable controversy was sparked by her U.K. tax situation. According to reports, Murty possessed non-domiciled status, which allowed her to pay a charge of £30,000 a year and avoid paying tax on income earned outside of the U.K. Some estimate she would have saved around £20M in tax for around the last 7 ½ years.

After a ferocious outcry from the media, the opposition party and the general public, Murty eventually discontinued the arrangement. All of this was entirely legal, but definitely raised some eyebrows, considering that her husband was the Chancellor of the Exchequer at the time, and was overseeing the UK tax system.

Sunak and Murty are thought to be worth a combined £730M, which is around double that of the fortune of King Charles III and Camilla. They have four homes around the world apparently worth more than £15M that they share with their two daughters, but will reportedly move back into the flat above number 10 Downing st during Sunak’s term.

Market Whisperer?

In his maiden speech as new PM, Sunak acknowledged the good intentions of Truss for wanting to kick start the country toward growth, saying it was a “noble aim.”

“But some mistakes were made,” he continued, “and I have been elected as leader of my party, and your Prime Minister, in part, to fix them.”

It was a welcome statement, and so far Sunak’s appointment has managed to calm markets through his promotion of financial stability. The insurmountable task that remains ahead for him is to prove to the public and investors that even though he faces strong headwinds in the form of rising interest rates, energy prices, and inflation, the Ukrainian conflict, and the fallout from the pandemic, he may still be able to successfully steer the UK through a likely recession if not stagflation.

A fund manager speaking to the Wall Street Journal spoke of Sunak as having a CV that gave markets a feeling that there would be a more conservative and less aggressive influence at the helm. With a broad understanding of finances, he felt that monetary policy would be stable as a result of his appointment.

10- year government bond yields (Gilt) returned to their pre-Truss-budget levels last week below 4%, and the FTSE Index has been up for a couple of weeks now according to ActivTrades data.

Weekly FTSE Cash Index Chart – Source: ActivTrader’s platform

Sharp U-turn in policy

Sunak and his government are now likely to turn their attention toward filling the deep dark hole that has grown in the public finances. To fix the £35B shortfall, Sunak and his Chancellor of the Exchequer, Jeremy Hunt, are expected to publish their economic plans on the revised date of the 17th of November. While it’s obviously not known exactly what’s in the plan, there’s been reports that they’ve compiled a list of 104 potential ways to cut government spending already.

There’s also a fairly good chance that windfall taxes will be brought back as a possibility for energy firms and banks, a concept Truss was staunchly opposed to, as she wanted to encourage investment in the UK.

It’s a pretty fair call when taking into consideration the latest Q3 earnings report from companies such as Shell, which showed that they had raked in almost $10B in extra profits for the quarter. The oil giant’s shares have risen by 40% in 2022 so far on the back of the global tightening of supplies of oil and gas, and they’ve just announced they’ll be increasing dividends by 15%.

Britons will wait patiently for the new budget to be revealed in mid-November, which unlike that of his predecessor, will be fully audited by Britain’s fiscal watchdog. In the meantime, the Bank of England meets on Thursday the 3rd of November for its Monetary Policy Meeting where it is widely expected the Committee will add another 75 basis points to the Bank Rate, bringing it to 3.00%.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

ECB Hands Down Hefty Rate Increase as Inflation Continues to Plague Europe

It’s the second consecutive increase of this size and third increase this year. While it may be the quickest pace that the ECB has ever raised its rates, analysts widely expect that there will be more large hikes of this nature to come. Inflation is still around 5 times higher than the ECB’s target mandate of 2%.

Meeting Details

The interest rate on the main refinancing operations is increasing to 2.00%, while interest rates on the marginal lending facility will jump to 2.25%, and the deposit facility rate will be lifted to 1.50%. These new rates will all be due to come into effect from the 2nd of November.

In its statement, the Governing Council noted that it had made “substantial progress” in its efforts to withdraw from its previously loose monetary policy that supported growth throughout the pandemic. Further rate increases are expected by the ECB, the size of which is to be decided on a meeting by meeting basis, as they take into consideration the “evolving outlook for inflation and the economy.”

Additionally, the ECB has now started the process of reducing its 8.8 trillion euro balance sheet, which would likely result in higher borrowing rates and might even be seen by some as a disguised rate rise.

Targeted Longer-Term Refinancing Operations, or TLTROs, are ultra-cheap three-year loans totalling 2.1 trillion euros that the ECB used to reduce the subsidy it gives to such lenders. Commercial banks may oppose this move, but the ECB was confident in its decision.

“In view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalization process and to reinforce the transmission of policy rate increases to bank lending conditions,” the bank said.

According to the ECB, in the future, the interest rate for TLTRO operations will be linked to the main ECB interest rates that are currently in effect. The modification aims to promote early loan payback.

Better Late Than Never?

It’s the same story across much of the world over nearly the whole of 2022. Inflation has been climbing rapidly on the back of soaring energy prices, supply chains are still being mended from the difficulties of the pandemic, China is still enacting cruel lockdowns impacting manufacturing, and the conflict in Ukraine is an ongoing factor, among other things.

A recent Reuters poll found that inflation may not reduce back to the target range in the Eurozone until the end of 2024 – or later – even with the current frontloading of rates.

The Governing Council worries that the price of everyday products and services is at risk of becoming entrenched, according to the minutes from the previous monetary policy meeting held in September.

This means that consumers will have expectations for higher prices that will later impact things like rent, school fees, medical services, and others that aren’t so easily re-adjusted back down. From there inflation can spiral and become “self-reinforcing,” as wages potentially have to be lifted and operational costs for businesses increase as a result.

With winter just around the corner, the fear is that the ECB will be forced to further tighten its monetary policy in a similarly aggressive fashion that will put enormous pressure on already stretched household budgets. If it turns out to be a harsh, cold season, some may be forced to make difficult decisions about whether or not they’re able to afford the cost of the electricity to heat their homes.

Recent Manufacturing and Services Purchasing Managers Index reports (PMI) for the Eurozone suggest that the sectors are predictably suffering a contraction in business activity. The index has been falling at its fastest rate in almost two years, as factories struggle with the cost of energy.

With all of this in mind, there’s much to consider for the central bank in these decisions, while the impact of these rate increases spooks investors and puts additional stress on the bond market. The possibility of a deep recession is very much still on the cards.

Where to Go From Here?

Many of the ECB’s central bank peers have lifted rates earlier and more forcefully in recent months to get on the front foot of dampening demand, chief of which is the Federal Reserve, which has lifted rates by 300 basis points so far this year.

Questions remain about how this strategy is actually working out for the US, in light of recent CPI data. Core inflation, which strips out the costs of food and energy, still increased 6.6% annually last month, with the overall CPI still remaining largely unchanged from the month before.

Rakeen Mabud, chief economist at the Groundwork Collaborative thinktank weighed in on the situation recently, saying, “Raising interest rates isn’t working, and the Fed’s overly aggressive actions are shoving our economy to the brink of a devastating recession,” she said. “Supply chain bottlenecks, a volatile global energy market and rampant corporate profiteering can’t be solved by additional rate hikes.”

If the US’s experiences provide some insight into what the Eurozone can expect from its tightening conditions, then it could prove to be a long and treacherous road ahead for the 19 countries that make up the bloc. Especially since the US also isn’t facing the same deepening energy crisis as Europe, and the impact from the conflict in Ukraine isn’t quite as pressing.

ActivTrades’ Forex data shows that the EUR/USD pair is heading down towards parity once more after the ECB meeting. Volatility remains high on this currency pair, as the USD is strongly strengthening against its peers this year.

As active traders, CFD on Forex offered by the regulated CFD broker ActivTrades are a way to take advantage of bullish and bearish price movements through leverage and margin trading. While this trading technique might help you reach higher profits, the risk of loss is also elevated if markets go against you, or if you do not understand (and properly manage) leverage.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

Netflix Publishes Surprisingly Positive Q3 Results Ahead of the New Ad-based Streaming Release

After a challenging first half, we believe we’re on a path to reaccelerate growth.” The company statement read.

The streaming giant which boasts over 220 million subscribers and a presence in 190 countries has been scrambling to reverse the 1.2 million drop in subscribers it had in the first half of the year.

The decrease in popularity was due mostly to the uncertain state of the global economy, an increase in competition from other streaming companies, firm price increases in key markets, the decision to suspend its services in Russia, and the impact of inflation on people’s ability to afford the service.

The strength of the US dollar relative to other currencies has also had a negative impact on Netflix‘s earnings, as has been similar to many international companies with US headquarters. Since consumers abroad have less buying power as a result of a high US dollar, and US enterprises already have a price disadvantage, foreign demand for US exports generally suffers. In that case, Netflix suffered when repatriating its profits in weaker foreign currencies into the US.

Prior to Tuesday’s earnings announcement, the stock price of Netflix had dropped by up to 70% just this year, leaving many to wonder how it could possibly recover. However, the company’s projection that it will add 4.5 million subscribers in the fourth quarter helped drive the stock price up more than 10% in after-hours trading. As you can see on the bottom left part of the following chart from the online ActivTrader trading platform, the global sentiment is extremely positive on Netflix’s shares, as 80% of traders are buying the stock.

Daily Netflix chart – Source: Activtrades

More on the Q3 Numbers

Netflix’s Q3 revenue growth of 6% over the previous quarter was said to have been fueled by a 5% increase in average paid memberships, and a 1% increase in average revenue per membership (ARM). Revenue and ARM increased 13% and 8%, respectively, year over year when the effects of foreign currency were excluded. The sequential sales reduction was said to be completely attributable to the strength of the US dollar.

The company’s Q3 operating income was $1.5 billion, down from Q3 2021’s $1.8 billion during the boom of the pandemic. The combination of greater revenue and the deferral of certain expenditures from the third to the fourth quarter helped with the achievement of a larger operating income than was anticipated at the start of the quarter. Earnings per share were $3.10 compared to $3.19 from the previous year.

A big part of the turnaround was the extremely popular season four of Netflix’s sci-fi “Stranger Things” which concluded during Q3, while the serial killer series “Dahmer – Monster: The Jeffrey Dahmer Story” became one of Netflix’s surprisingly most viewed series ever, with hundreds of millions of hours of viewing despite its gruesome content.

Major Competition

In its statement, the company noted that the streaming market is becoming very competitive, with new companies launching often. Consumers also now have a wide variety of other entertainment options, including social media, gaming, other streaming sites, YouTube, and TikTok.

Netflix still sees many opportunities for future growth though, as it takes a relatively small piece of the overall viewership in comparison to the other options available. The streaming service currently accounts for only around 8% of total TV time in the US and the UK.

The firm also speculated on other companies’ financial standings for the year in its statement.

Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.”

Netflix Q4 Outlook

Next month, Netflix is set to roll out its new ad-supported plan in a dozen countries that will be priced at around $7, compared to the usual premium option of around $15 to 20.

Reuters quoted an analyst, speaking about the new service, who was confident that the move to a cheaper option would mean that current subscribers would be tempted to downgrade their membership. Further hinting that there might be fewer cancellations as a result and hopefully some new users.

Despite the high level of optimism over the new advertising business, the company said it didn’t anticipate a major contribution in Q4 since they are going to be introducing the Basic with Ads plan throughout the quarter. The aim is to gradually increase the number of members in that plan over time and to increase the options available to potential new members, rather than to disenfranchise the present ones.

The company pointed to the strengthening US currency as continuing to be a big obstacle in the fourth quarter. Because of the tightening monetary policy cycle voted by the Federal Reserve since the beginning of the year, the greenback strengthened strongly against its counterparts, such as the EUR, the GBP, and the JPY among others. The EUR/USD went below parity this year for the first time since 2002, while the USD/JPY reached today a new high, almost reaching 150.

Weekly charts of the EUR/USD, the GBP/USD, the USD/JPY, and the AUD/USD – Source: ActivTrades

Netflix anticipates sales of $7.8 billion next quarter, with the sequential reduction fully attributable to the US dollar’s ongoing strengthening against foreign currencies. This also corresponds to a 9% increase in income from the previous year on a constant currency basis.

An anticipated 4.5 million new subscriptions are expected and ARM growth to total 6% from the previous year excluding foreign exchange.

After nearly two years one of Netflix’s most popular series, The Crown, is back for its third and final season, while many other popular programs and movies are set for release in Q4, including a vast selection of holiday-themed movies.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

How Will the US Labor Proposal Shake Up The Gig Economy?

It’s a shift that is anticipated to have a major impact on the US gig economy and on businesses that offer ride-hailing, delivery, and freelance services, among others.

This is the first step of what will likely be a lengthy process before coming to a determination. After a 45-day public comment process that started last Thursday, the final regulation (if it is approved) is anticipated to be published next year.

What is the Gig Economy?

The gig economy, which is sometimes also known as the on-demand workforce, generally relies on mobile applications or websites to link service providers and customers, and businesses also use these platforms to charge customers for these services. These platforms are often promoted as a means to provide customers with more options, convenience, and freedom in their everyday lives.

The classification covers a wide variety of services, including:

  • ride-sharing services, where customers hire a person to drive them somewhere ;
  • delivery services, where customers hire a person to bring them food or other items ;
  • as well as personal services, where customers hire a person to perform creative or professional tasks like graphic design and web development ;
  • and other odd jobs like furniture assembly and house painting.

The gig economy may provide people with flexibility and convenience as an employment choice. Workers may be able to combine their employment with other obligations like schooling, family obligations, other jobs, or hobbies. It also offers the ability to work when and how frequently they choose.

Some individuals decide to make their primary living via the gig economy. Others periodically work in the gig economy as a complement to their primary source of income as they transition toward retirement, or when they change occupations or careers.

Nevertheless, many in the industry are classified as independent contractors, and as such they’re not entitled to the employment benefits and protections of an employee. Not being required to pay these incentives can represent a large saving in overhead expenses to the employer, which is why the pending rule change could be very disruptive.

What Will Biden’s Proposal Mean for Independent Contractors?

According to the proposal published last Thursday, a business must classify those who are “economically dependent” on them for their main paycheck as employees instead of independent contractors.

By guaranteeing them the minimum wage, overtime pay, and reimbursement for transportation and certain other work-related expenditures, the proposed adjustments have been promoted as a blessing for many employees, especially some of the most vulnerable in the workplace.

There is some risk to consider in restricting independent contracting though, as it would potentially force certain businesses to recruit fewer people, thereby eliminating some positions. Companies would also have more authority over individuals who are treated as employees, and there would naturally be less flexibility offered to employees.

According to the Labor Department, before the final decision is made, it will (among other things) take into account whether employees have the chance to make more money or lose out if their positions are permanent, and how much influence an employer has over them.

Some economists believe that there will not be any advantage to the majority of gig workers, as for the most part, these jobs are supplemental and not treated as full-time positions anyway.

The United States is not alone in considering changes to the rules surrounding the gig economy, as there is a precedent being set around the world in recent times. On 9th December 2021, the European Commission (EC) announced a similar and long-awaited proposal containing rules to enhance the working environment of platform employees. The Directive intends to improve algorithmic transparency and fairness, and avoid employment misclassification.

In the UK, a Supreme Court Ruling in 2021 fell against Uber after a six-year battle in favor of a collection of drivers that were fighting for fairer conditions. The Court found that Uber should have been paying their drivers as employees, and since then, they now pay a minimum wage for the time that a driver is carrying passengers instead of a set fare per trip. They also now pay some entitlements, such as holiday pay, sick leave, and retirement contributions.

Is It Worth Investing in the Gig Economy Now?

The gig economy is understandably on shaky ground at the moment as it comes to terms with the possibility of an overhaul of the entire system. It’s important to remember though, that there won’t be any decision on the new proposal for a little while yet. If there’s enough of a challenge mounted by the main stakeholders in the industry, and there’s a huge incentive for this to happen, then it’s possible it may all be a moot point.

The threat of policy changes sent gig stocks tumbling after the announcement last week, with losses of more than 12% for Uber (UBER.N), more than 8% for Lyft (LYFT.O), and more than 13% for DoorDash (DASH.N).

Weekly charts of Uber and Lyft – Source: Online trading platform Activtrades powered by TradingView

Depending on what eventually happens with the proposal, the whole idea could see these companies struggle for some time, as it will undoubtedly discourage investors. This will then cost consumers who rely on services, and will potentially eliminate positions of employment available to workers at a time when many of the most vulnerable in the community needs them most.

As an active trader, you can take advantage of market volatility and falling prices with financial derivatives like CFD or Contracts For Difference. With a regulated CFD broker like ActivTrades, you can therefore trade these American stocks in the short-term with leverage and margin trading to start with a small capital and take advantage of all market conditions.

Moreover, ActivTrades offers fractional shares, which means that you don’t have to buy or sell a full share to profit from it. You can start with any trading capital! It is also possible to build a stock portfolio with no leverage with ActivTrades (1:1) and at no cost (no trading, custody, or account management fees).

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 85% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. ActivTrades Corp is authorised and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B. The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication. All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

Pound Hits All-Time Lows in the Wake of New UK Fiscal Measures

As investors began dumping their UK assets in a massive fire sale that started on Friday further crippling the pound – the currency hit an all-time low of $1.03528 on Monday, according to ActivTrades’ data.

The currency has since bounced back from this level, but some investors are wondering if the GBP/USD might reach parity any time soon. Today, the sentiment indicator shows that 61% of investors are buying the pair after the dip, while 39% of traders are still bearish.

Weekly GBP/USD Chart – Source: Online trading platform from ActivTrades, the ActivTrader platform

The New “Growth Plan”

The mini-budget includes what some opponents are calling “risky” adjustments to the country’s tax plan, including £45 billion in total cuts to stamp duty, the basic rate of income tax, and the cancellation of a corporation tax rise that was due next year.

These measures, which figure among the new government stimulus of around £60 billion promised to offset the rise of energy prices and cost of living crisis, have many experts questioning the method for funding the plan, as the country battles rampant inflation and economic uncertainty.

Chancellor Kwarteng was seemingly unmoved by the market turmoil. Speaking to Laura Kuenssberg of the BBC on Sunday, he said: “As chancellor of the exchequer, I don’t comment on market movements. What I am focused on is growing the economy and making sure that Britain is an attractive place to invest.”

Kwarteng’s plan is for more tax cuts to come in the future, with this current round to be broadly funded by a public borrowing plan. But at the same time, the BOE has had plans in place to sell around £80 billion in gilts to scale back its balance sheet over the next year.

10-year gilts have increased by 131 basis points already in September, an almost unprecedented increase, suggesting that the market may expect the BOE to be more aggressive with interest rate rises to reduce inflation in the future.

In the policy statement from the UK Government website, a target trend rate of 2.5% growth has been set, among other various reforms that would allow businesses and individuals to keep more of their earnings and stimulate the economy.

We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone,” Kwarteng proclaimed in the statement.

Parity with the USD Looking More Likely by the Day

Bloomberg reports a 60% chance that the pound will reach parity with the dollar before the end of 2022 if current trends continue without intervention.

While the USD on its own has been growing in strength in recent months and benefits from being seen as a safe haven during economic uncertainty, the sterling has also been gradually growing weaker against other currencies at the same time, such as the euro. Some economists are predicting that the Bank of England, or the government, may need to intervene at some point to reassure the market.

The last time the pound performed this poorly against the dollar was back in 1985 when Margaret Thatcher was in power in the UK. A few years beforehand in the US, President Raegan had instigated large tax cuts, which boosted the economy, and then the Federal Reserve increased interest rates and prompted many investors to purchase US assets. This pushed the pound to around $1.05.

Back to 2022, and despite the point that the US has not battled with the same energy crisis and other economic difficulties such as growing trade deficits that Great Britain has, the Fed has still increased headline interest rates this year quicker and heavier than the UK to tackle rising inflation, with a total of 300 basis points so far and a forecast for more 75 basis point moves to come. In contrast, the BOE has lifted rates by just 215 basis points.

As the interest rate differential continues to grow between the two major economies, investors will tend to move their capital to higher-yielding assets, such as those in the US, as their rates continue to climb. Foreign investors must sell their own local currency in order to purchase USD for their investments, which leads to more demand for the USD and less supply. The price of the USD will then be pushed higher as a result.

The difficulty that the central banks all face is that if they continue to raise rates too high and too quickly in the fight against inflation, they will, in turn, cool the economy too much and send the country into a recession. It’s a tightrope that the US seems to have navigated somewhat well so far, as most of the economic data in recent months suggest that the economy is still able to cope with further interest rate hikes.

An analyst told CNBC on Monday, there was a strong likelihood that the BOE would have to hold an emergency inter-meeting rate increase to reduce pressure on the pound.

Fed Continues on a Steep Rate Hike Trajectory While the Bank of Japan Maintains Negative Rates

Yesterday, the Federal Reserve increased its key rates by 75 basis points again, up to 3-3.25%. It’s the third increase of this size in as many meetings, and Fed Chair Jay Powell is warning the job is far from done, with more increases likely over the coming meetings. CNBC quoted an analyst as saying that “75 is the new 25 (basis point increases) until something breaks, and nothing has broken yet.”

The announcement led to a dip in the US stock market (right chart below from ActivTrades), as the median official expected interest rates for the end of the year and in 2023 have been reviewed upwards by the Fed’s projections. The USD climbed to a 20-year high (left chart below from ActivTrades), as many economists brace for a looming recession and homeowners continue to feel increased pain from rising mortgages and the cost of living.

Daily Charts from the Dollar Index and the Dow Jones – Source: Online ActivTrader platform

In the meantime, Japan has decided to continue with its loose monetary policy with no increase in rates announced from the Bank of Japan’s two-day policy meeting which ended today.

Continuing to hold steady at -0.1%, and with no future increases in sight, the central bank is bucking the trend of tightening monetary policy around the world post-pandemic. It’s a significant contrast with other central banks, as the Bank of England, the Reserve Bank of Australia, the European Central Bank, the Reserve Bank of New Zealand, and of course the Federal Reserve, are all still lifting – or expected to continue lifting – their interest rates for the foreseeable future to bring inflation back to acceptable levels.

The BOJ is also continuing its policy to guide the country’s 10-year government bond yields to around zero percent in an effort to support the continued growth of the economy, while it’s expected that the pandemic relief program that kept small companies afloat is finishing up at the end of the month.

Japan’s headline consumer inflation, which excludes volatile fresh food, but includes fuel costs, is being impacted by the increase in commodity prices, sitting at 2.8%, and rising at its fastest pace in almost 8 years. The BOJ is confident though that this increase is merely transitory.

The expectation is for inflation to climb further to 3% by the end of the year, which is above the mandate of the central bank’s 2% goal but far below the majority of other developed nations.

The country’s annualized growth for the second quarter grew 3.5%, but it’s expected that it may slow slightly in this current quarter due to short-term increasing pressure from commodity prices.

So, why is Japan still keeping rates so low, and how is it impacting the country’s currency?

The Yen Continues to Fall but Things Might Change With the Intervention of the Bank of Japan

Following the announcement from the BOJ and the previous Federal Reserve’s announcement, the U.S dollar hit a 24-year high, rising around the 145 yen level on Thursday in Tokyo trading. The market sentiment indicator from ActivTrades shows that most traders are bearish on the currency pair (74 %) and expect the USD/JPY to continue rising (see the dedicated box on the left of the following chart).

Daily Chart USD/JPY – Source: Online ActivTrader platform

It’s a trend that’s been building for a while now, as interest rates climb in the U.S and across the world as a result of runaway inflation, and investors move to purchase higher-yielding assets in these countries while selling off local currencies to do so.

As the interest rate differential widens between Japan and other countries, and more investors sell their Japanese currency to invest elsewhere, the value of the YEN becomes weaker due to less demand.

Local Japanese news reported the Bank’s Governor, Haruhiko Kuroda as saying that rapid fluctuations in the yen were “unfavorable,” that the continuation of low rates was still necessary as a measure to support the economy’s recovery, and that eventual rate hikes will probably be needed to stop the yen from continuing to fall against the USD, as it was a threat to the economy.

Things might change now that the Bank of Japan intervened for the first time since 1998 by purchasing the yen for the dollar.

The Japanese Finance Ministry said on Thursday that it has taken action to boost the yen by intervening in the foreign exchange market. The yen’s value has been declining against the dollar since March due to a widening disparity in the monetary policies of the United States and Japan.

Since the beginning of the year, the value of the dollar has increased relative to the yen by more than 20%, but today’s action by the Japanese government might release some of the selling pressure observed on the yen… but for how much longer?

A Slow Recovery in Progress Could Help Strengthen the Yen

Japan is slowly reopening after long periods of isolation from the rest of the world throughout the Covid-19 pandemic. Tourism ground to a halt in the popular destination as it did all over the world, but Japan has taken its time by lifting border restrictions inch by inch.

Analysts believe reintroducing tourism to the country will help reinvigorate the yen, as travelers rush to take advantage of the struggling weak currency.

Tourists could be forgiven for being wary of traveling back to Japan though, according to some, as the prolonged closures may have damaged the country’s reputation and policymakers and the local media blamed the spread of the coronavirus on foreigners entering the country.

Even though tourist groups had been accepted in recent months, the hoops that had to be jumped through to enter and the need for chaperoning with a guide while there have kept many from visiting.

The world’s third largest economy welcomed around 32 million foreigners in 2019, with plans to hit 40 million in 2020 before the pandemic hit, and according to the Nikkei Asia, it will hopefully open the border and remove the 50,000 person daily number restrictions among others in October after the full ban was imposed in November 2021.

Prime Minister Fumio Kishida spoke during an Economic and Fiscal Policy meeting on Wednesday, saying “It’s important for us to work to strengthen Japan’s earning power, taking advantage of the current yen weakness.”

With its major tourism industry hopefully heading back into full swing and the price of the yen being in such a weak position at the moment, it’s an interesting time for investors who might look at taking the opportunity to invest in the country.

Should You Invest In AI Stocks?

What Is AI?

Artificial Intelligence, or AI, is basically machine learning, or a process by which computers simulate our human intelligence through a collection of complex systems. There are many different applications of AI, including speech recognition, vision, language processing, and expert systems.

AI makes it possible for computers or machines to receive data through various means of technology – like movement or heat sensors for example – to interpret and arrange what they perceive into a somewhat logical order, solve a problem, and then act in a way that achieves the desired outcome.

On some level, the hardware that possesses AI is capable of adapting what they do to suit its environment or even ‘learn’ from previous behavior with the use of analysis and the ongoing collection of data.

The technology has been around in various primitive forms for decades, but it’s become far more complex in recent years and its use is becoming more widespread in countless industries. There are benefits to consider, such as enhanced productivity, technological advances, medical advances, and cheaper goods and services, but also concerns to take into consideration too, such as potential issues with privacy, safety, and security for example.

The public can be naturally dubious and uncertain about some applications of AI – after all, we don’t really know where the technology is headed long term.

So, is AI the way of the future for your investment strategy? How can you take advantage of this growing space and invest wisely with a secure broker like ActivTrades? Let’s take a bit of a look into the world of AI and you can decide what options might be suitable for you.

How Do Companies Use AI In Their Businesses?

There are so many industries that are being enormously affected by investment and growth in AI technology at the moment. Some include Health Care, Automotive, Travel, Marketing, E-commerce, Social Media, Law Enforcement, and Finance, but there are many others.

One of the lesser known, but fairly important users of AI, is the Agricultural industry, with the most notable example in this space being John Deere. Their technology aims to take the guesswork out of farming and to use AI to target and fix trouble areas, like weeds or dry spots, among other things. They’re using specific sensors, drones, targeted spraying, and driverless tractors to be able to increase productivity and output by significant margins.

Another prominent company that is hugely reliant on AI is retail giant JD.com, located in China. An e-commerce site that sells almost every product imaginable expects its business to be completely automated in the future. And the company already has warehouses that are completely free of employee involvement, and deliveries of products to consumers have been conducted by a network of drones for a few years already.

How To Recognize Artificial Intelligence Stocks

You may already have investments in your portfolio that expose you to AI without being aware of it as it’s become so widespread, but if you’re actively on the hunt to focus on the technology there are a few options available. You’ll just need to do a little research because there aren’t too many companies with AI at the center of their business.

The top stocks to look at are from companies that are making ongoing investments in things like infrastructure for networking, data centers, cloud-based operations, and robotics, among other things. Think big tech companies like Amazon, IBM, Alphabet, Microsoft, Nvidia, and Meta, but also lesser-known companies like Intuitive Surgical, who specialize in creating technology for minimally invasive surgical procedures with the use of robotics and AI.

How To Trade Artificial Intelligence Stocks

You might like to purchase individual shares directly for your preferred company or look into financial derivatives such as Contracts for Difference (CFD) which allow you to invest in the price movements of a company, but not actually own the underlying stock. This method also allows the trader to take advantage of leverage and potentially make magnified returns on the emerging technology of his choosing.

Some Exchange-Traded Funds also offer products specific to AI. This is called Thematic Investing, which focuses on a specific theme such as AI, communications, or clean energy, for example. Different companies from different sectors may be involved, but they are all a part of the same objective or part of a popular trend.

Generally, the products to look for are those that contain a basket of the top publicly traded AI and robotics stocks that are selected by the fund based on their preferences. ARK Autonomous Technology & Robotics ETF is one such example and includes (as of September 2022) Tesla, Deere & Co, and Trimble Inc, among a few others.

Whatever your investment strategy, whether using derivatives, ETF, or buying individual stocks, it’s vitally important to have a trading plan in place and remember that AI is an emerging sector, one with risk involved. You’ll need to do your research and have a well-established risk management and trading plan that you’re prepared to stick to – and never invest more capital than you’re comfortable losing.

How Will the New Prime Minister Influence Growth in the United Kingdom?

Liz Truss, of the Conservative Party (colloquially the Tory party), has just become the newly minted prime Minister for the UK this past Tuesday 6th September, after the resignation of her predecessor, Boris Johnson. She met with the Queen at Balmoral during the day and flew back to Downing Street for her first address to the nation shortly after.

The 47-year-old Truss is now the country’s 56th prime minister, and just the third female to hold the position, after Margaret Thatcher and Theresa May. She will have one of the more difficult sets of challenges to face in her term compared to those that came before her, prior to the general elections being held in January 2025.

With the dire cost of living situation and rising inflation looking overwhelming, energy prices skyrocketing, the conflict in Ukraine to manage, the economy on the verge of recession, and other industrial issues, she will need to deliver strong leadership and be very effective to turn things around for the economy.

Truss has been in the parliamentary cabinet for 8 years and has served under 3 prime ministers: Cameron, May, and Johnson. Prior to her own recent appointment, she was promoted to foreign minister, where she led the transition after Brexit to a new set of diplomatic ties and trading platforms.

She succeeded against the former finance minister, Rishi Sunak, in a very tight race, where the majority of the Conservative party’s lawmakers were originally against her, and some MPs feel she ran an aggressive campaign that has alienated many in her already divided party.

This could make it difficult for her to find support for her plans in parliament, regardless of her vision for the country, if she doesn’t work to mend fences.

In his farewell speech from Downing st, prior to formally tendering his resignation to the Queen on Tuesday, former Prime Minister Johnson called for party unity, saying, “It’s time for politics to be over, folks. It’s time for us all to get behind Liz Truss.”

What Policies Can We Expect?

Outside her new home and office at Downing st, London, she addressed the crowd shortly after a heavy downpour of rain.

I am confident that together we can ride out the storm. We can rebuild our economy, and we can become the modern, brilliant Britain that I know we can be. I know that we have what it takes to tackle those challenges. Of course, it won’t be easy, but we can do it,” she said.

Truss campaigned on a few major priorities prior to her appointment. No new taxes was one of the most prominent, and she is actually in favor of tax cuts as well, namely the scrapping of increases to corporation tax on major companies and the reduction to the payroll tax, which would together cost around 30 billion dollars in revenue losses. She plans to provide a solution to rising energy costs and wants to fix the struggling National Health Service (NHS).

Her agenda during campaigning also included plans to review the Bank of England’s mandate, to possibly reign in the independent decision-making process on interest rates, which has made many investors uncertain.

In a statement, Truss also pledged that her government would take immediate action on the spiraling cost of energy as soon as her first week in office. Reuters reported on Wednesday of her potential plan to freeze the country’s energy bills for a so far unknown period of time.

These are some big calls to make after the previous government’s spending spree over the past few years of the pandemic, and it has many financial analysts warning of a huge increase to the deficit, especially if it costs taxpayers as much as expected, which is anywhere between 100-200 billion pounds, depending on how long the crisis persists.

Ms. Truss also has no intention of funding her plans with the use of new windfall taxes for energy companies, as she feels it will not be of benefit to investments in the country, instead, her new finance minister, Kwasi Kwarteng, met with senior bankers in London on Wednesday. They set out plans to borrow more in the short term to support households and drowning businesses, while in the medium to long term, she believes reforms on the supply-side will boost the country’s growth trajectory.

How The Markets Responded

The idea of revitalizing growth with the strategy of cutting taxes, whilst also pledging to spend hundreds of billions of pounds to help the country pay for their energy bills, and then the thought of potentially tampering with the independence of the BOE, has understandably got financial markets in a bit of a buzz of uncertainty.

A few days ago, markets focused on the extra borrowing that Ms. Truss may need to reduce home energy prices, causing a major sell-off of British government bonds on Tuesday, bringing 10-year gilt rates to their highest level since 2011, around 3.125%.

The same scenario can be applied to other maturities. The 5-year gilt rates reached their highest level since 2009 at around 3.061%, while the 30-year gilt rates reached their highest level since July 2014 at about 3.411%.

The pound has fallen against the dollar a few days ago to lows not seen since the mid 80’s, when Margaret Thatcher was in power, and is slightly rebounding from its bottom at 1.15077 at the time of writing. ActivTrade’s sentiment indicator on the AcitvTrader platform shows that traders are mostly buying the currency pair (70%).

Daily GBP/USD Chart – Source: ActivTraders

This fall is predominantly a result of the strength of the dollar, but worries about the United Kingdom’s growth prospects and soaring inflation have also weighed on the local currency.

Economists from the popular American investment firm Goldman Sachs warned that a recession was a real possibility in the country, and that inflation in the United Kingdom might top 20% as early as the beginning of next year if spiraling gas costs do not come down.

What should traders expect from the GBP from now on? Will it keep falling, or will it bounce back?

The Dollar Index at Its Highest Level Since 2002

Once again it has hit an almost new high of 2022 at 108.85 (at the time of writing), which is just shy of the 109.14 recorded on July 14th. The last time we saw numbers like these was back nearly 20 years ago in December 2002, when the dollar was performing extremely strongly relative to most other currencies, and was just shy of 119 at its peak.

Daily chart of the Dollar Index (September 2022) – Source: ActivTrader platform

So what’s the driving force behind the increase in value this year? Will it go higher? Let’s take a look at some of the background and stats for the USDX.

What Is The Dollar Index?

The USDX was originally introduced in 1973 by the U.S Federal Reserve, during that time it included the German mark, Dutch glider, French franc, Italian lira, Belgian franc, Swiss franc, Japanese yen, Canadian dollar, British pound, and the Swedish krona, until it was adjusted for the first and only time in 1999 when the Euro came into use and replaced some of the previous currencies.

The collection of currencies that remain in the index is generally thought of as a representation of the most significant U.S trading partners, and the underlying point of the index itself is to measure the value of the U.S dollar against those currencies.

The USDX has had since its inception, as it does now, a base of 100, and throughout its history has experienced many highs and lows depending on a variety of factors. If the index value goes above 100, then that is suggestive of an appreciation of the USD relative to the other six currencies. If the index is losing strength against the other currencies then it will be below 100. In 1984, the USDX hit a record high of almost 165. Conversely, 2007 saw the index drop to a low of nearly 70 at the beginning of the financial crisis.

It can be affected by a myriad of factors, mostly macroeconomic in nature; inflation, deflation, interest rates, economic growth or lack thereof, supply and demand, and major world events, among others. Any factor that would influence each individual currency in the index and/or the USD can affect the overall USDX.

It’s also really important for traders to take some notice of the weightings given to the currencies within the index, as price movements on one currency, like the Swiss Franc, for example, will have far less significance than if the same movements were to occur with the Euro. They’re not close to being on equal footing within the index, so the impacts would be different.

The weighting given for each currency is as follows:

  • Euro (57.6%)
  • Japanese yen (13.6%)
  • British pound (11.9%)
  • Canadian dollar (9.1%)
  • Swedish krona (4.2%)
  • Swiss Franc (3.6%)

Why Has the Dollar Index Recently Reached New Highs?

Slowly over the last few months, amid numerous rate hikes by the Federal Reserve, the US dollar has been rising. Policymakers have cautioned that the country’s difficulties with soaring inflation will continue to be met with aggressive tightening of monetary policy over the coming months, regardless of a short recession as a likely side effect.

Mildly positive economic data in recent weeks has given many experts reason to question whether the Fed can start to reduce the rate of hikes at the coming meeting, with Reuters reporting recently that a poll of economists indicated that a move of 50 basis points was now slightly more feasible than the previously expected 75 basis points move for the Fed’s next meeting in September.

Fed Chair Jerome Powell, who will be present at the Jackson Hole symposium this year on August 25th-27th, will be updating the market on his views of the ongoing situation with the economy and the Fed’s role in stabilizing inflation. The economic event, located in Jackson Hole, Wyoming, United States, is closely followed by traders, as statements from prominent central bankers, leading financial players, ministers and academics can be impactful on stocks and currency prices.

In addition to conditions in the U.S, the euro has hit fresh lows this month after Russia declared that there would be a three-day closure of the Nord Stream 1 pipeline at the end of August, which is the main supply of gas to the Eurozone. This puts further pressure on the already strained situation, with energy prices in the region skyrocketing and inflation continuing to soar.

How to Take Advantage of the Dollar Index

There are a number of ways to trade the USDX by using derivative products for example, such as contracts for difference, spread bets, or futures, and it’s also available as part of some ETFs and mutual funds.

Using CFD with regulated brokers like ActivTrades allows the trader to utilize margin trading to take advantage of price movements heading upwards (long positions), as well as price movements heading downwards (short positions).

Some traders use the index as a means to hedge against any downside risk with the USD, or to speculate on the dollar’s movement against the other major currencies as well. When the outlook is unclear regarding the movements of the U.S. dollar, the USDX can generally provide a clearer picture.

However you choose to invest, and the financial products you prefer to use, it’s important to follow your overall trading strategy with strict money management rules, and only invest money you’re prepared to lose.

Difficult Weather Conditions and a Possible Drop in Demand From China Weigh on Soybean and Wheat Prices

Many experts are concerned that crop yields need to be extremely plentiful during this season, especially relative to the less-than-expected number of acres of plantings in the U.S – the second largest exporter of soybeans after Brazil – to stop global supplies from reducing even further over the next year.

It was an optimistic prediction that came from the United States Department of Agriculture (USDA) on Friday 12th August, as the federal agency forecasted the yields from the U.S soybean farmers to top records made back in 2016. These surprising numbers were not expected by analysts for a variety of reasons, chief of which were the scorching conditions that farmers experienced across the continent over much of the summer period.

There is a strong requirement for soybeans to be well-watered throughout August to produce adequate pods, and previous conditions throughout the year have left many wondering if the rain will arrive in time, especially throughout North Dakota, South Dakota, Nebraska, Minnesota, and Iowa, all which form part of the Corn Belt. It’s still hoped that forecasted rains for the rest of the month will come to fruition and further bump yields.

The USDA’s currently predicted yield of 51.9 bushels an acre – up 0.5 of a bushel from last year – is on par with record results from a great 2016 season, even though that year saw vastly different weather conditions to what we’re seeing so far now in 2022.

The rainfall from 6 years ago was almost unprecedented, and spread right across an immense region of farmland, with records going back to the late 1800’s only showing similar numbers.

In comparison to 6 years ago, 2022’s rainfall measurements have been well below average for most states, except in some areas in the east, making many growers nervous about their ability to meet demand. The condition of crops and whether they’re healthy enough to produce high yields are also at stake with lower rainfall, and ratings currently hover around 58% good or excellent. In the same week back in 2016 ratings were just above 70%.

The monthly report from the USDA assured that although the dry spell had hit farmers hard in the areas west of the Mississippi – causing possibly irreversible damage like improperly formed pods – shortfalls in production could be made up by better yielding crops located in other states, like Ohio, Indiana, and Illinois. The USDA’s next report will be critical, as they will then report on field measurements that will include counting average pod numbers to determine plant health and yield.

Some Traders Are Questioning the Numbers

When making an observation of the 2022 yields, rainfall, acres planted, and condition of crops, while comparing previous seasons, one could be forgiven for not necessarily following how the yield from this year’s crops could be similar to that of six years ago.

It seems traders were dubious of the forecasts too, as futures for soybeans fell pretty sharply after the USDA released its report.

Reuters reported the Chicago Board of Trade’s (CBOT) most active soybean contract had lost 0.7%, down to $14.02-1/4 a bushel, at 03:09 GMT on the report day. In contrast, the US’s other major exports of corn and wheat were up 0.3% to $6.26-1/4 per bushel and 0.8% to $8.07 1/2 per bushel respectively.

Daily chart – Wheat Sept 2022 – Source: ActivTrades

Big Importers Looking Shaky

There are also now growing concerns that China could pull back on its imports, as the top importer has posted data suggesting a contraction of the economy. A March report by the USDA’s Foreign Agricultural Service suggested that China would import a record-breaking 100 million tonnes of soybeans through the period 2022-2023, but as demand has waned during the worst of the pandemic lockdowns, these numbers are possibly in doubt.

Imports for July were already down 9.1% from the same time a year ago, as shown by customs data, and reported on by Reuters. Last year’s July imports were 8.67 million tonnes, compared to this year’s 7.88 million tonnes. Poor crush margins – which take into account the production costs of making soy meal and oil – and higher prices for importing are said to also have negatively impacted demand.

Uncertainty Remains in the Chip Industry

Even though US inflation eased slightly in July, especially on lower oil prices, the CPI index is still extremely high at 8.5% year over year. As inflation continues to plague numerous industries across the globe, the impact it’s having on the semiconductor industry continues to cause concern as experts fear it may be heading into a possible downturn.

This past Tuesday, the 9th of August, Micron Technology Inc, the U.S Semiconductor manufacturer, dramatically reduced its current-quarter revenue forecast, citing a recent slowdown in the demand for personal computers and smartphones. Meanwhile, on the Monday prior, the U.S tech company Nvidia also advised of a decline in its gaming business, which has caused its second-quarter revenue to drop by a dramatic 19%.

In immediate light of the news, Nvidia’s shares dropped 8%, and on Tuesday, Micron’s shares fell 5.7%, pushing the Philadelphia SE Semiconductor index, composed of 30 members who are largely engaged in the creation of semiconductors as well as their distribution, manufacturing, and retail sales, down 4.3%. Since then, they’ve all bounced back to their pre-fall levels. Sony, Advanced Micro Devices, Qualcomm, and Intel have also all reported a softening in demand.

Daily charts of Nvidia and Micron – Source: ActivTrader platform

Micron has even warned of a negative free cash flow situation in the next few months as a result, a condition not seen since the beginning of 2020. The company now has plans to spend less on new manufacturing plants and equipment and is cutting the number of chips they create in response, to ensure the integrity and stability of their chip prices.

The company’s chief business officer, Sumit Sadana, told Reuters in late June that the shift from high to low demand had been “bigger than anyone was anticipating.” And that the changes would already be rippling through the ecosystem.

A highly cyclical business

In the last few months, the decline in orders has mostly been seen in chips that are used in technologies for smaller consumer products and gadgets, but more recently it’s been broadening to other markets too, including industrial, automotive, and data centers.

Some companies were understandably banking on a surge in demand post-covid, with the population supposedly heading back to work and experiencing better economic conditions, but inventories of chips and accessories continue to pile up in factories as sales stagnate.

After years of shortages across the globe, when wait times for certain chips were around six months at one point, and major companies like Apple lost out on countless millions of dollars worth of sales as a result, investors are now anxiously watching the industry as it experiences a sharp market correction, the likes of which have not been seen in around a decade.

During the height of the pandemic, smartphones, personal computers, and other technology were in unusually high demand, as the population moved to working and studying from their own homes. Naturally, companies worked hard to meet this new boom in demand, putting more and more capital into technology, manufacturing, and data centers to support the massive shift in consumer spending.

Now it seems that the tables have turned since the worst of the pandemic has apparently passed, and an oversupply of stock and other expenditures for many companies may cause consistent losses in the coming months while they make adjustments and/or divest.

As the cost of everyday living also skyrockets as a result of growing inflation, and interest rates continue to be increased worldwide, consumers are re-working their household budgets and weighing up the importance of spending their disposable income on leisure activities such as gaming and keeping up-to-date with new devices and technology if what they have is already working fine.

Innovation helps growth

One company that has apparently skirted the latest downward industry trends, according to their July earnings report, is the Taiwan Semiconductor Manufacturing Co. (TSMC). The company boasted its second record-breaking month with a 6.2% sales bump in July above the previous month, with US$6.23billion.

Analysts credit the revenue increase to the superior processes that have been developed to meet the demand for emerging technologies in computing and automotive electronics, such as the 5-nanometer and 7-nanometer processes currently in use, and the new 3-nanometer and 2-nanometer processes to be developed and produced in the near future.

U.S set to boost local production

Despite the current waning demand, the U.S will now provide $52.7 billion in subsidies to boost its local production, research, and technology in a bill signed by President Biden on Tuesday the 9th of August. The bill aims to push the U.S to be more competitive with China and will affect industries including automotive, white goods, video games, and weapons systems, among others, while also creating thousands of jobs.

Companies out of Taiwan, such as the Taiwan Semiconductor Manufacturing Co. were responsible for around 60% of chip foundry revenue around the globe last year, and there are fears that the U.S is far too dependent on them for its key industries.

President Biden called it “a once-in-a-generation investment in America itself.” But skeptics argue that the grants for private businesses would be treated as blank checks. As expected, many of the major U.S Semiconductor company CEOs were present at the signing.

Europe Scrambles for Energy Alternatives as Gas Prices Skyrocket

The fear that there will be energy shortages and rationing across the continent coming into winter has driven coal-fired power plants out of retirement, and new terminals to be built to support the influx of liquefied natural gas (LNG) coming in from the U.S.

Cutting Russian dependence

Once Europe’s largest provider of natural gas, Russia is reducing the output through the key Nord Stream Pipeline 1 run by state-owned gas company Gazprom, blaming turbine issues. Last week the capacity through the line was cut in half again, down to just 20% of its usual volume, which some officials see as retaliation for recent sanctions placed on the country for its conflict with Ukraine.

On the back of the announcement from Gazprom, the latest measure to reduce reliance on Russian supply is an agreement between the Energy Ministers in the EU to reduce their overall gas needs from August through to March 2023 by 15%. Countries are to voluntarily ration their usage, potentially impacting households and businesses, or it may become a mandatory requirement if the situation becomes more urgent.

The outlook becomes more dire if there are any delays in delivery of L.N.G from the U.S, if the weather impacts the production of gas out of Norway, or if the winter is exceedingly cold and energy requirements are higher than usual.

Unforeseen circumstances aside, there is some comfort to be taken by the fact that Europe’s stored gas is at a reasonable level, at close to 70% of capacity, or slightly more than the same time last year, with salt caverns and other facilities looking to be filled towards the end of the year in case Russia fully closes off supplies.

Despite this, the price of gas is soaring as European gas futures on the Dutch TTF exchange hit close to 200 euros a megawatt-hour, nearly ten times what it was just a year ago, and it’s causing governments to push for alternatives as some businesses consider closing their factories which could see thousands lose their jobs as a result.

Something has to give.

Natural Gas September 2022 CFD – Source: ActivTrader platform

On the hunt for alternative fuel sources

Energy deals are currently being struck all over the world from countries such as Kazakhstan, Saudi Arabia, Nigeria, and Iraq to cover potential shortages, and the results seem to be on track with demand so far, but none of them are perfect.

The greatest contributor to filling the gas void from Russia has come in the form of liquefied natural gas, which has to be chilled to -259 degrees Fahrenheit and condensed into a liquid before it can be transported via large cargo ships, primarily out of Texas shale fields in the United States. This has pushed prices to rise faster this year in the U.S on a percentage basis than diesel, crude or gasoline, at $9 per million British thermal units last week, or more than double that of last year’s prices.

According to the Natural Resources Defence Council (NRDC) though, the process of chilling, shipping, and regasifying LNG is far more carbon-intensive than the alternative room temperature gas via pipeline, so this doesn’t fit well with the carbon emission goals of many countries worldwide.

The other prevailing consideration for LNP, is that Europe is in an uncomfortable bidding war with Asia, as China, South Korea, and Japan are usually the largest consumers of the commodity, and aren’t accustomed to having to pay such high prices.

Some countries are looking to coal as their backup, either revamping their older plants or pushing back their planned closures. Germany and Romania are two such countries, with the former being particularly at risk as it currently doesn’t have a terminal to receive LNP. Although they’re rushing to get installations built, it may not be in time for winter.

The European Commission back in May gave the all-clear for the EU to use additional coal to cover shortfalls for as long as the next decade, which it says will not impact carbon reduction targets for the long term, even considering the high impact of burning coal.

At the same time, the EU also pledged to increase the use of wind and solar options to reduce the reliance on Russian gas, with officials saying it can take years to attain permits and then get these projects built, so there needs to be changes in laws to speed up the process.

A greater use of nuclear energy is also on the cards for some countries that already have reactors in operation, like France, Spain, and Belgium, among others, as these facilities don’t often run at full capacity. The downside to this is that Russia provides around 35% of the enriched uranium required for the plants to operate, new plants take around a decade to build and come online, and there is always a level of nervousness surrounding safety.

In an interview with Deutsche Welle (DW) recently, the European Energy Commissioner Kadri Simson, assured the public that despite the difficulties that may lie ahead, there was still reason for hopefulness. “For households, it is important to know that they are protected consumers,” she said. “So, even under the worst case scenario, when we will lose some LNG shipments because of global competition and if there will be an extremely cold winter with long cold spells, we will take care of households.”

Tech Giants Hover Above the Storm

The news on Tuesday, July 26th coming from both the Microsoft (MSFT) and Alphabet (GOOG) camps with their recently published earnings reports is a sigh of relief for investors and is so far having a calming effect on Wall Street, with both companies only missing their earnings estimates by a small margin. They’re showing that they may just weather the troubling conditions currently plaguing the market as a whole.

Although globally it seems the landscape is changing with what drives business in recent times, as evidenced by the tech-heavy NASDAQ losing around 26% of its value this year, a few companies are innovating just enough to stay above their smaller competitors.

It’s all about taking advantage of changing consumer habits

Both companies reported that in addition to other segments of their businesses, their cloud and advertising services were a large part of the reason for their better than expected (or feared) results.

Much of the world has been forced to adjust their behavior over the last few years, with many spending more time online during the pandemic, whether it was working from home or shifting their buying habits, so showing growth in these areas would seem to make logical sense.

The CEO of Alphabet and Google, Sundar Pichai, commented on this in his statement, saying, “The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.”

Microsoft executive vice president and chief financial officer, Amy Hood, similarly commented, “In a dynamic environment we saw strong demand, took a share, and increased customer commitment to our cloud platform.”

Microsoft revenue totaled $51.9 billion and increased 12% over the same period last year. Their operating income increased by 8% to $20.5 billion. A net income of $16.7 billion saw a 2% increase, and the diluted earnings per share were $2.23, up 3%. The company showed its best ever sales for the cloud service, Azure, which were up 28%.

The company this month was also selected by Netflix to partner in their newest ad-supported, cheaper subscription service, a potentially significant new source of revenue.

Alphabet’s figures show its lowest growth rate since the 2020 April-June quarter, but they are still in an enviable position compared to most other non-tech companies in the current landscape. Its revenue totaled $69.69 billion and increased 13% compared to the same period last year. Their operating income increased to $19.45 billion, up from $19.36 billion. A net income of $16 billion saw a small drop from last year’s $18.52 billion, and the diluted earnings per share were $1.21, down from $1.36.

Google Cloud fell short of target earnings by around $1 million at $6.3 billion, and ads through YouTube came in under budget, with $7.3 billion as opposed to $7.5 billion in estimates.

So far, these two firms have avoided the pitfalls that other large businesses across the world have been experiencing. Supermarket giant Target’s shocking first-quarter earnings are one such example, as is Walmart’s predicted decline in profits for its upcoming report due in August. Many point to the ongoing issues with inflation, household costs increasing, and supply chain issues as having a huge impact on such retailers.

Online rivals in the social media world, Twitter and Snap have also just seen negative fourth-quarter earnings, with some analysts pointing to the fact that ad content can be more expensive through these types of social media as opposed to search engines, as it requires more than just text.

Both companies still communicate caution though

Despite the somewhat positive reports and forecasts, the quarter hasn’t been without its setbacks, and risks remain for both companies. Ever-increasing inflation, wages, fuel prices, raw material costs, and shortages from the China shutdowns are making some businesses that were formerly customers re-evaluate their spending on ads for marketing. The strong dollar has also meant a lower cash return after converting from foreign currency for both businesses.

Alphabet recently cut sales in Russia due to its aggression in Ukraine, and the company missed a huge opportunity to partner with Netflix in its new movement into ads on its service, to the advantage of Microsoft. The company announced back on July 20th that they would be implementing a hiring freeze for a few weeks which seemed to be a worrying sign, but over the whole quarter, there was actually an increase of around ten thousand new employees.

Additionally, antitrust regulators across most markets have also impacted Google’s share of the revenue from app sales.

Microsoft has seen a drop off in sales of its PC’s compared to the previous year, and a slight drop in advertising spending has also had a small impact. The company is also hitting the brakes on hiring. In an effort to achieve “structural adjustment,” Microsoft has cut jobs, yet plans to add more. This time, the layoffs affected less than one percent of its 180,000-person workforce and were distributed across geographies.

How the market responded

Tuesday’s regular trading session ended with a loss of 2.3% for shares of Alphabet. But the company’s shares went up around 5% on the back of the announcement in after-hours trading. Microsoft ended the day with a loss of 2.68%, but its shares were also bolstered by about 5% after the company published its earnings.

Traders seem optimistic about the companies’ ability to take the necessary steps to adapt to the new macroeconomic environment and continue improving their financial situation. ActivTrades’ sentiment feature on the left part of the below chart shows that the sentiment for both companies is highly bullish, with 85% of the ActivTrades community buying Alphabet and 95% buying Microsoft.

Daily charts of Microsoft and Alphabet – Source: ActivTrades’ online platform (ActivTrader)

ECB Surprise Hike Has No Effect on the EUR

For the first time in over 10 years, the European Central Bank (ECB) has made the decision to deliver an interest rate hike in the wake of the deepening crisis with inflation, now at 8.6% across its 19 member countries. The move of 50 basis points was unexpected by both analysts and economists alike and was double the increase assured at the last monetary policy meeting in June, where rates at the time remained the same.

The interest rates on the marginal lending facility, the deposit facility, and the main refinancing operations were all increased by the same increment to 0.75%, 0.00%, and 0.50% respectively, putting an end to 8 years of negative rates, and will come into effect from the 27th of July.

In its statement, the Governing Council explained that it had been appropriate to take a more significant step in its path to policy rate normalization by frontloading the exit from negative interest rates, stating “the decision is based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy.”

More hikes are already being forecasted in the months to come, as the target of 2% inflation for the medium term is still the goal of the Council. These increases will be determined on a meeting-by-meeting basis, the next of which is scheduled for the 8th of September.

Leading up to the announcement the euro was continuing its fall against the USD, boosted by the possibility of the Fed increasing its main interest rate by 75 basis points (or more?) next week – not forgetting that the consequence of the potential energy crisis in Europe is adding bearish pressure to the EUR.

EUR/USD & EurBund Sep2022 – Source: ActivTrader Online Trading Platform

High inflation is the main issue – and not only in Europe

This is the latest in a spate of increases seen in nearly every corner of the globe over the last few months. Many countries are having to navigate the same record-breaking inflation numbers whilst walking the tightrope of keeping their economies from sliding into recession.

The Federal Reserve (Fed) last month increased rates by 75 basis points and is tipped by economists to raise rates again by the same amount in July. The Bank of England increased rates from 1% to 1.25% last month and is slated to increase them again by 50 basis points at the next meeting after inflation hit a forty-year high of 9.4%.

The situation facing the ECB’s president Christine Lagarde is particularly high stakes, having to ensure a balance between the 19 euro countries with the weaknesses and debt burdens that they each carry.

Evidence of this is the current political turmoil in Italy, with the resignation being confirmed today of its Prime Minister, Mario Draghi, after three of the main partners in his coalition snubbed him in a confidence vote that he had initiated to try to repair their splitting alliance.

It now appears as though the country’s President, Sergio Mattarella, will be looking to call early elections in the coming months. The announcement triggered Italian bonds and stocks to be sold off sharply as a result and increased the cost of Rome’s borrowing.

Debt financing stress prompts new monetary policy

With Italy’s situation partly in mind, the Council also announced the approval of its “anti-fragmentation” program called the Transmission Protection Instrument (TPI), which will be used to counter unwarranted, disorderly market dynamics that threaten the way monetary policy can be transmitted smoothly across the Eurozone, allowing the ECB to ensure the delivery of its price stability mandate.

In her statement, Lagarde pointed to the flexibility in reinvestments of redemptions coming due in the pandemic emergency purchase program (PEPP) portfolio as the first line of defense against the risks to the transmission mechanism related to the pandemic.

Continuing in her statement, she cited the ongoing conflict in Ukraine as a major drag on economic growth, continuing pent-up supply relative to demand, and the rising cost of energy and everyday products as having a dampening effect on the economy. The Governor further commented that inflation was likely to “remain undesirably high for some time, owing to continued pressures in the pricing chain.”

Adding to the stress for citizens is the tightening of credit standards for all loan categories according to most recent bank lending survey reports. “Banks are expected to continue tightening their credit standards in the third quarter.” Said Lagarde.

The Governor reassured that there were reasons for some positivity though, indicating that there are signs of bottlenecks in supply improving, the labor market is remaining strong, many in the population were able to build on their personal savings during the pandemic, and with economies re-opening there is some hope that the tourism industry may start to rebuild and improve economic numbers in the third quarter of the year by supporting spending in the services sector. Unemployment is also at a historical low of 6.6 percent (May figures).

In summing up, Governor Lagarde further mentioned that the council was ready to adjust all of its instruments within its mandate to ensure that inflation was going to stabilize at the target of two percent over the medium term. But will it be enough?

After the UK, Spain is Taxing Companies Making Extraordinary Profits. Who’s Next?

With many of the major economies around the globe struggling to keep inflation under control and the price of living skyrocketing, it was really only a matter of time before extraordinary measures were needed to ease the pain…

A little background

Back in WWI and WWII, the British, US, and Canadian governments – among others – imposed a tax on corporations that were making extraordinary profits on the back of those crisis conditions, in order to support the population and help with the ongoing recovery of their economies.

This tax, commonly known as “windfall tax” or “excess profits tax” tends to be temporary but can also become permanent, depending on the government’s specific policies. It’s generally levied on business income that is above a normal rate of profit. The ‘extra’ income is taxed at a separate rate in addition to the individual or corporate income tax that is already paid.

Understandably this is not a popular policy among many of those involved in the high-earning corporate world as it reduces some of the motivation derived from making a profit, but there are extreme circumstances where it makes sense and seems only fair to employ them.

Who’s using the measure right now?

Now in the wake of the pandemic, the conflict in Ukraine, supply chain issues, and China’s lockdowns, among other things, there are many companies that seem to have clearly taken advantage of increased prices, government support programs for businesses, and new booming demand as a result of government policies.

In the case of Spain’s recent decision to introduce such a tax, their Prime Minister, Pedro Sanchez of the Socialist Party, told parliament in a state of the nation speech on Tuesday 12th July that the new measures should generate around 7 billion euros in 2023 and 2024.

In justifying the decision, which came as a total surprise to some in the banking industry, Sanchez commented that inflation was the biggest challenge for Spain, comparing it to “a serious illness of our economy that impoverishes everyone, especially the most vulnerable groups.”

Shortly after the announcement, Sabadell (SABE) closed with a drop of 7.4%, Bankinter (BKT) fell 5%, and Caixabank (CABK) also recorded a fall of 8.6%. Most of them are falling today, as the IBEX35 gets deeper in the red today, as you can see on the above charts from the ActivTrader platform.

Spanish stocks

In opposition to the announcements relative to financial lenders, Reuters reports that the Spanish banking association’s spokesperson, Jose Luis Martinez, commented that the “European Central Bank’s possible rise in interest rates did not necessarily ensure an improvement in bank’s profitability, nor did it translate into extraordinary profits, but rather responded to the rise in inflation and may lead to less economic activity.” Possibly pointing to the idea that the banks were perhaps not the most worthy targets for increased taxation.

Specific companies targeted in Spain, although the finer details are still unknown, will be those with turnovers of over 1 billion euros. This would include energy firms that are benefiting from rising prices and financial institutions since interest rates were on the way up.

Prime Minister Sanchez further commented that the profits from rising prices “must be returned to citizens” rather than “fattening” the “salaries of big business leaders,” he said.

The Spanish government isn’t the first to resort to a temporary excess profits tax policy this year. Back in May, despite Boris Johnson’s objections that it would be a bad move for investment, the UK imposed a 25% energy windfall tax on oil and gas producers for the same purpose of helping the population deal with surging household bills. This was hoped to be phased out when the price of commodities returned to normal levels, whenever that may be.

Similarly in Italy, the government declared that its energy companies would have to pay a once-off 25% levy due in November to combat rising prices. As did Hungary with a comparable policy around the same time, with their Economic Development Minister, Marton Nagy, saying in a statement that the new set of windfall taxes imposed on banks and a range of other companies like insurers, energy firms, and airlines (among others) would be temporary and targeted measures.

India also imposed a tax of 23,250 rupees per tonne on their domestic production of crude. The government commented that the new levy was introduced “by way of special additional excise duty” and tracks the rapid increase in international crude prices.

Who might be next?

While it hasn’t been legislated yet, there have been recent talks of introducing a tax on the excess profits of oil and gas companies in the US. Senate Finance Committee Chair, Ron Wyden, called for the 21% tax to be implemented for companies with over $1 billion in yearly revenue in a statement on the 14th of June.

Senate Budget Committee Chairman, Bernie Sanders also promoted the idea of a 95% tax on windfall profits of those companies earning more than $500 million in annual revenue at a hearing back in April. Stating: “We’re seeing record-breaking levels of stock buybacks. We’re seeing high dividends. We are seeing and living through a moment in American history where the people on top are doing phenomenally well while working people are struggling.” Sanders pointed to specific companies such as Exxon Mobil and Tyson Foods as reporting much higher profits during the last couple of years of the pandemic.

Supporters say the current increased revenues for these companies are a direct result of the conflict in Ukraine and the fallout from the pandemic, and not from better business strategies or new investments, but some economists argue that a windfall tax will just have the opposite effect of what lawmakers hope, leading to higher prices again and more reliance on foreign imports while doing nothing to stimulate local production.

Canada’s International Institute for Sustainable Development published an article on the 11th of July, suggesting the windfall tax as a viable alternative to their current measures for reducing stress on households, and those in the country’s provincial green parties have been calling for the idea to be revisited ahead of their next ministers’ meeting due to be held in the coming days.