08 Aug 2022
8 min read
This week saw the Bank of England deliver its biggest rate hike in 27 years. The Fed, meanwhile, sent out speakers to reverse the dovish interpretation of its most recent meeting. This week also saw earnings updates from sharing-economy firms Uber and Airbnb. We also look at Chinese banks, which are caught in the middle of the country’s property crisis and could be nursing big losses as a result. Finally, we revisit the Rhine River, which has continued to dry up and is on the verge of being all but impassable. That would have big consequences on the European economy. Let's find out why.
The Bank of England raised interest rates by 50 basis points on Thursday – its biggest hike in 27 years – and laid out plans to sell some of the £844 billion worth of bonds it’s accumulated over the years. Bond sales are expected to begin in September and will be in the region of around £10 billion a quarter.
While the BoE was the first major central bank to hike rates after the pandemic, it had until now stuck to smaller increases of 25 basis points. That left it at risk of falling behind the curve, with some 70 other central banks having hiked by 50 basis points or more this year.
The BoE also gave some rather gloomy economic forecasts. It expects a recession to begin in the UK in the fourth quarter and last all the way through most of next year. That would be the longest slump since the financial crisis, with officials expecting the economy to shrink by around 2.1% in total. The BoE also boosted its forecast for the peak of inflation to 13.3% in October amid a surge in energy prices, and said inflation will remain at “very elevated levels” throughout 2023 before falling back to its 2% target in two years’ time.
Across the pond, Treasury yields spiked on Tuesday after Fed speakers sought to reverse the dovish interpretation of the US central bank’s most recent meeting. Fed officials effectively pushed back against last week’s growing narrative that policymakers are eyeing a pivot away from monetary tightening amid evidence of a weakening economy.
San Francisco Fed President Mary Daly said the central bank was “completely united to get inflation down”, while Cleveland’s Loretta Mester said she wants to see “very compelling evidence” that month-to-month price increases are moderating. That caused traders to reconsider how much more the central bank will raise interest rates and whether it could move to cut them in early 2023.
Did you hear about Chinese homebuyers boycotting their mortgage payments? Here’s why this matters: Chinese banks have more exposure to the property sector than to any other industry. The chart below shows that there were 39 trillion yuan of outstanding mortgages and another 13 trillion yuan of loans to developers at the end of March, according to data from the People’s Bank of China. That’s equivalent to $7.7 trillion, and puts the country’s financial sector in a very delicate position.
What’s driving the boycotts? Let’s take a step back. See, it’s normal for Chinese homebuyers to pay in advance for a yet-to-be-built property, and that process has worked fine in the past. But the government’s recent clampdown on the real estate sector has brought activity all over the country to a halt, and it’s pushed homebuyers who have paid in advance for a yet-to-be-built property to boycott mortgage payments until they see construction resume again. These boycotts are happening across more than 90 cities.
Chinese banks are caught in the middle of this crisis, and could be nursing big losses as a result. In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan ($356 billion) – or more than 6% of mortgages – are at risk of default, while Deutsche Bank is warning that at least 7% of home loans are in danger. As for banks’ 13 trillion yuan of loans to developers, things aren’t looking up either: some 28 of the top 100 developers by sales have either defaulted on bonds or negotiated debt extensions with creditors over the past year.
All in all, you can probably understand why investors are nervous, and why the Hang Seng Mainland Banks Index plunged 12% last month. But that drop could be just the start if the boycotts pick up momentum. And if the 2008 global financial crisis taught us anything, it’s that problems at banks can spread quickly and eventually drag the wider economy down with them. That adds a new risk to the Chinese economy and comes on top of slowing growth, Covid-related lockdowns, rising tensions with the US over Taiwan, and more.
Moving on to US tech, Uber’s stock soared almost 20% on Tuesday after the ride-hailing giant reported better-than-expected results. The value of bookings made on Uber's platform – across its ride-hailing, delivery, and freight offerings – hit a record high, helping second-quarter revenue more than double to $8 billion from the same time last year. To cap it all off, Uber also hit a significant milestone: the firm posted its first-ever positive cash flow last quarter, after burning through around $25 billion since it was founded 13 years ago.
Airbnb’s results, meanwhile, didn’t have the same pleasing effect on investors. While the home-rental firm, like Uber, benefited from an increase in consumer spending on activities as opposed to goods, its bookings came in below expectations. Nights and experiences booked in the second quarter rose 25% to 103.7 million, missing analyst estimates of 106 million. The firm also provided bookings guidance for the third quarter that was lower than expected. Investors had heard enough and sent Airbnb’s stock lower after the results.
We were talking about the Rhine River just two weeks ago, and now we have to talk about it again. Recap: the roughly 800-mile Rhine runs from Switzerland to the North Sea, and it’s used to transport tens of millions of tons of commodities through inland Europe.
Two weeks ago, the river’s water level was at its lowest point for that time of the year since at least 2007 due to droughts. And many feared that a heatwave back then would drag water levels even lower. Fast forward to today, and those fears have materialized: the water level is set to drop to 47 centimeters by the weekend, putting it within just 7 centimeters of being all but impassable. Put differently, the Rhine’s water level is set to fall alarmingly close to the point at which it would effectively close, halting the flow of everything from fuel to chemicals as governments try to prevent the energy crisis from tipping the region into recession.
The last time the water level was this low was during the 2018 heatwave, and the resulting disruption dented Germany’s fourth-quarter GDP growth by 0.4%, according to estimates by JPMorgan. The problem is, this time around, transporting goods via the river is even more important because it’s one means of compensating for lost Russian energy supplies. For example, Germany is having to burn more coal to generate electricity, but the Rhine’s low water levels are already preventing some power plants from getting all the coal they need.
Michael Saylor is stepping down as the CEO of MicroStrategy after the software company reported a $1 billion loss in the second quarter. What does this have to do with crypto? Well, MicroStrategy's mega-loss last quarter was virtually all down to a $920 million impairment charge stemming from its bitcoin holdings, which have plunged in value. Saylor has been one of crypto’s biggest advocates (and still is), but his decision to step down might cause other firms considering adding bitcoin to their balance sheets to think again. Saylor’s decision, after all, comes just a few weeks after Tesla revealed that it sold off the majority of its bitcoin holdings.
Second-quarter earnings season is quietly winding down but there are still a few big names reporting next week including Disney, Palantir Technologies, and Rivian Automotive. On the economic front, we have July’s inflation numbers coming out of China, Italy, Germany, France, and the US. Traders will be paying particular attention to the US inflation numbers to gauge the Fed’s next move in September. After all, the US central bank hiked rates the last time it met and signaled that more are coming but gave no further details, saying the magnitude of its next increase will depend on economic data.
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.