News of the week summary - 09/01/24
🇨🇳China export restrictions threaten western chipmakers
China’s export restrictions on key minerals, germanium and gallium, are disrupting global supply chains and raising concerns about production shortfalls in Western industries, especially for advanced semiconductor chips and military optical equipment.
These minerals are critical for manufacturing semiconductors, communications equipment, and military hardware. Since China implemented export controls last year—citing “national security and interests”—the prices of germanium and gallium in Europe have nearly doubled. China dominates global supply, producing almost all of the world’s gallium and 60% of germanium, making many Western companies reliant on its exports.
These restrictions are seen as a response to US-led efforts to curb China's access to advanced chipmaking technology. Experts suggest this move demonstrates Beijing’s willingness to target Western economic interests. Since the controls took effect, overall exports of gallium from China have dropped by about half, leading to warnings of potential shortages if the situation continues.
Companies affected by these controls have reported difficulty sourcing sufficient quantities of the materials. This has added significant complexity to already tight global markets, especially for industries dependent on germanium and gallium for producing fiber-optic cables, night-vision goggles, and advanced chips.
Prices for germanium have surged by around 50% since June, with some traders saying Chinese suppliers are no longer offering germanium for overseas buyers. The restrictions also extend to other critical minerals, including antimony, used in ammunition and precision optics, adding further pressure to global supply chains. Analysts believe China’s actions send a strong signal that it can retaliate against US pressures on its technology sectors, affecting not only the chip industry but also defense and communications.
💹Chinese central bank bought ≈$60B worth of sovereign bonds
China’s central bank, the People's Bank of China (PBOC), made a significant move by purchasing RMB 400 billion ($56.3 billion) of long-term sovereign bonds, which traders believe signals potential future intervention in the country’s bond markets. This purchase included RMB 300 billion in 10-year notes and RMB 100 billion in 15-year notes, issued by the Ministry of Finance to roll over maturing bonds.
Analysts speculate that the PBOC is preparing to directly influence bond yields, which have been rallying due to investor bets that China will need to stimulate consumer demand. However, falling yields could increase the risk of liquidity issues in the banking system, prompting concerns about a potential market shock similar to that seen with Silicon Valley Bank.
This move is interpreted as an effort to stabilize yields and prevent an uncontrolled snapback. The PBOC’s actions are seen as part of a strategy to manage the yield curve and reduce the risk of financial instability in China’s rapidly expanding debt market.
By purchasing long-term debt, the PBOC gains flexibility to influence bond prices in the future. Selling these bonds could raise yields and help maintain financial stability, particularly for institutions reliant on longer-term funding, such as pension funds.
The PBOC holds around $150B in government bonds, primarily with shorter maturities of one to three years, but this latest move extends its influence into longer-dated bonds.
📉Eurozone inflation hits three-year low
Eurozone inflation fell to a three-year low of 2.2% in August, raising expectations that the European Central Bank (ECB) will reduce interest rates next month. The decline aligns with forecasts and follows July’s inflation rate of 2.6%. Analysts believe this marks progress toward the ECB's goal of bringing inflation closer to its 2% target.
Inflation data from Germany, Spain, and France also indicated declines, although France's inflation remained slightly higher than anticipated, potentially influenced by price pressures from the Paris Olympics. Despite this, the overall trend suggests inflation is cooling across the region.
Markets are now betting on a quarter-point rate cut at the ECB’s September 12 meeting, which would lower the benchmark rate to 3.5%. This would follow a similar cut made by the ECB in June. Traders are also pricing in the likelihood of two or three additional cuts before the end of the year.
However, there are some concerns among policymakers about rising services inflation, which reached 4.2% in August. This increase, attributed largely to the impact of the Olympics in France, may prompt caution from the ECB. Nonetheless, many economists believe this is a temporary spike and unlikely to derail the ECB’s plans for rate cuts.
The ECB is not alone in considering lower rates. The US Federal Reserve is also expected to make its first rate cut in over four years in September, as inflation in the US holds steady at 2.5% and the labor market shows signs of slowing.
💱British Pound reaches 2 years-high against the dollar
The British pound surged to its highest level against the US dollar since March 2022, as expectations for rate cuts in the US outpaced those in the UK. Sterling rose by 0.4% to $1.325, maintaining its strongest monthly performance against the dollar since November.
This boost in the pound comes after contrasting statements from central bankers. US Federal Reserve Chair Jay Powell signaled the potential for rate cuts, while Bank of England (BOE) Governor Bailey expressed caution, saying it was too early to declare victory over inflation in the UK. This divergence in outlooks has supported the pound’s strength, as the Fed is expected to cut rates much quicker than the BOE.
The pound's rise has also been boosted by stronger-than-expected UK economic data. In the second quarter, the UK economy grew by 0.6%, surpassing market expectations, and private sector activity reached its fastest pace in four months. Optimism surrounding the new UK government and potential growth-enhancing reforms has further lifted confidence in the British economy.
Despite these positive indicators, services inflation in the UK remains persistently high at over 5%, a concern closely monitored by the BOE. Wage growth has slowed to 5.4%, its lowest in nearly two years, yet the labor market remains resilient, with unemployment unexpectedly declining.
The BOE recently implemented its first rate cut in over four years, with the key rate now standing at 5%, but policymakers remain divided over the future path of rates. Traders are expecting the BOE to make further cuts, reducing rates by a percentage point by mid-2024. In contrast, investors predict the US Federal Reserve will make seven or eight quarter-point rate cuts over the same period, with the possibility of the first cut as early as next month.
🇹🇷Turkish stock market cools following higher interest rates
Turkey’s previously booming stock market has experienced a significant decline as high interest rates attract savers and foreign investors look to take profits. The Istanbul Bist 100 index (tracking the 100 most valuable companies listed in Turkey) fell 8% in August, marking its largest monthly drop since October 2023.
The MSCI Turkey index, which tracks the market’s performance in US dollars, fell about 10%, making it the worst performer among emerging markets tracked by MSCI. This reversal highlights the broader effects of Turkey’s economic overhaul, which is aimed at controlling soaring inflation.
Turkey’s stock market had surged in recent years, driven by local investors seeking refuge from inflation, which peaked at over 85% in late 2022. The Bist 100 more than doubled in dollar terms since early 2022, with foreign investors returning to Turkish equities after years of decline.
However, Turkey’s central bank has aggressively raised interest rates, from 8.5% in June 2023 to 50% recently, as part of new economic policies. While stocks initially responded positively to these more orthodox measures, many local savers are now being drawn to high-interest lira deposits and money market funds, where annualized returns of around 53% are available, significantly higher than a year ago.
The shift in investor sentiment, coupled with concerns about whether policymakers will maintain tight economic measures, has caused a "cooling" in local stock buying. Analysts are watching closely to see if Turkey will stick to its current economic approach, with September seen as a crucial period for setting expectations for 2025.