As we announced in these same columns since last fall and as we confirmed at the beginning of 2022 in our annual forecasts, the year 2022 is indeed the year of the end of financial excesses and the return to reality. Indeed, after a first warning shot last January in the wake of the confirmation of persistently high inflation and a first phase of rising bond interest rates, then a second storm at the start of the war in Ukraine, the financial markets are entering a new phase of severe correction. And this, in particular on the stock markets, on the euro/dollar and on cryptocurrencies. The figures speak for themselves: in 17 days, bitcoin has plummeted by 30%. Since November 2021, it has collapsed by 57.9%, reaching a low since December 2020.
The other cryptocurrencies are not left out: -60% for Ethereum since November 2021, -79% for XRP since April 2021, -84% for Litecoin since May 2021, -89% for Doge also since May 2021 …Even StableCoins that are supposed to remain stable against the dollar have lost value over the past few days. Obviously, for those who thought that cryptocurrencies were “safe havens”, the shower is cold. However, they will not be able to say that we did not warn them…
>> Read also – The 10 most asked questions about Bitcoin
In the wake of this descent into hell, the flagship index of growth stocks, in this case the Nasdaq, is also experiencing a particularly devastating storm. Thus, in six days, the Nasdaq composite index tumbled 12.3%. Since November 2021, it has plunged 29.2%, reaching a low since November 2020.
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As for the more traditional stock market indices, the sharp drop is also on the agenda. Between the peak of early January 2022 and the low point of the last few days, the S&P 500 fell by 18.1%, the Dow Jones by 13.8% and the CAC 40 by 17.9%. In addition to being justified by a logical corrective movement after the excessive surge of 2021, as well as by the continuation of the war in Ukraine, these severe falls are also corroborated by the economic statistics of the last few days.
Thus, in China, in the wake of the country’s lockdown, the Caixin purchasing managers’ indices for April fell well below the 50 mark, which represents the boundary between growth and decline in activity: 46.0 in industry, 36.2 in services and 37.2 for all sectors. This confirms that the Chinese economy is on the verge of recession. However, this disappointment did not prevent the Middle Kingdom from beating record after record in terms of trade balance. Thus, in April, the Chinese trade surplus reached 51.12 billion dollars over one month and a new historic high of 743.93 billion dollars over one year.
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What underlines that a lasting blockage of the Chinese economy will massively affect the supplies of many countries across the globe, aggravating shortages and thereby inflationary pressures. In this regard, it should be noted that despite the appreciation of the dollar which translates into a reduction in imported inflation, the annual shift in consumer prices remained very high in April in the United States. It thus reached 8.3%, after 8.5% in March and has therefore remained at its peaks since December 1981.
As for inflation excluding energy and food products, it also fell by 0.2 point in April, but, at a level of 6.3%, it has remained at a ceiling since August 1982. a favorable base effect, the annual shift in producer prices, a leading indicator of consumer prices, also fell by 0.2 points in April, but still remains very high, at 11.0%. This ongoing tension in producer prices indicates that year-on-year consumer prices could increase further over the coming months, or at best stabilize at high levels.
In other words, the US Federal Reserve will have to increase its key rates by at least one point to 2% by the end of this summer. However, insofar as the ECB continues to deny reality and refuses to react quickly and massively to the surge in inflation, the Fed-ECB money market rate spread will increase further.
A development that will obviously not fail to depreciate the euro/dollar a little more. The latter has just fallen to $1.0379, its lowest since January 2, 2003. As we explained here in our column last week, this depreciation of the euro/dollar is largely justified, but is nevertheless beginning to become dangerous for the stability and credibility of the Economic and Monetary Union.
Indeed, the more the euro falls, the more the inflation that rages in the EMU increases (due to the mechanical increase in the cost of imported goods, editor’s note), breaking the purchasing power of households and economic growth with it. But this, the ECB will obviously not be able to understand and prefers to wait, perhaps in July, to react. Amazing, right?!
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Marc Touati, economist, president of ACDEFI
His new book RESET – What new world for tomorrow? has topped the best-selling budget essays since its release on September 2, 2020
Find all his videos on his Youtube channel. The last of which, Fall of the euro: why, how far and what consequences?