“Knowledge born from actual experience is the answer to why one profits; lack of it is the reason one loses” — Gerald M. Loeb

1. Market Rout Shows Dangers of Margin Lending, Crypto Style — margin loans are one of the most common sources of the borrowed money, or leverage, that underlies the zigs and zags of financial markets. During the current winter for crypto firms and their investors, leverage is exposing crypto lenders’ risk-management failures and exposing many of their customers to significant losses and stressful uncertainty. In crypto, the legal and regulatory structures are far less developed. It isn’t always clear what a crypto lender can do with a counterparty’s collateral once it moves to liquidate. Lenders and the investment firms that borrow from them tend to have a much less-complete picture of each others’ finances than, say, a big bank like Goldman Sachs Group Inc. and its hedge-fund clients, said Richard Lee, a partner at Crowell & Moring LLP.
2. EU Seeks 15% Cut in Gas Use on Russian Supply Squeeze — the European Union proposed that the bloc cut its natural gas consumption by 15% over the next eight months in a plan that would affect all households, power producers and industry. The move reflects mounting concern that Russia will halt gas exports to the region in retaliation for sanctions following its invasion of Ukraine. A cutoff would threaten EU efforts to replenish stockpiles ahead of winter, potentially jeopardizing security of supply to key sectors and crippling the region’s economy well into next year.
3. Russia Resumes Nord Stream Natural-Gas Supply to Europe — Russian natural gas began flowing again at a reduced volume through a critical pipeline into Europe on Thursday, buying time for governments to decouple from the Kremlin’s exports amid what they expect will be an increasingly unreliable supply of energy from Moscow heading into the winter.
The Nord Stream pipeline connecting Russia with Germany under the Baltic Sea resumed operation after its annual maintenance, ending 10 days of tense speculation about whether President Vladimir Putin’s regime would cut off the gas flow to Europe in retaliation for Western sanctions after his invasion of Ukraine.
Gas-flow data showed the pipeline was operating at its premaintenance level of around 40% of total capacity.
4. ECB Raises Rates by Half-Percentage Point in First Hike Since 2011 — the European Central Bank raised interest rates by a larger-than-expected half-percentage point and unveiled a new plan to buy the debt of Europe’s most vulnerable economies, seeking to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth. The rate increase comes despite rapidly accumulating challenges facing Europe’s economy and the currency union’s cohesion—from a looming energy crisis to a protracted war next door, mounting political instability at home, and what many economists think has become an inevitable recession. Some of these could make it difficult for the ECB to focus on combating inflation.

The week ahead — Economic data from Econoday.com:

“The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead.” ― Howard Marks

1. Housing Could Provide More Fuel for Inflation — Overall annual inflation rose to 8.6% in May, while core inflation, which excludes volatile food and energy costs, hit 6%, according to the Labor Department’s consumer-price index. The June figures are set to be released Wednesday. Rising fuel costs and supply-chain disruptions from Russia’s war against Ukraine added to inflation that was already high due to surging demand from the economy’s reopening and aggressive government stimulus. Annual housing inflation, as measured in the CPI, hit a recent low in early 2021 at 1.4% and it has since rebounded, to 5.4% in May, well above the annual average of 3.5% between 2015 and 2019.
2. U.S. Inflation Hits New Four-Decade High of 9.1% — U.S. consumer inflation rose to a new four-decade high at an annual rate of 9.1% in June, extending a year and a half stretch of persistently higher prices.
The consumer-price index’s rate of increase last month was the highest since December 1981, the Labor Department reported. It also eclipsed May’s annual rate of 8.6% that led Federal Reserve officials to shift to a faster pace of benchmark interest-rate increases in its campaign to bring down inflation. Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said. The report likely keeps the Fed on track to raise its benchmark interest rate by 0.75 percentage point at its meeting later this month.
3. Euro Slips Below Dollar as Europe’s Economic Fortunes Slump — the euro’s slide below parity with the U.S. dollar reflects Europe’s sinking economic fortunes in the face of the war in Ukraine. But unlike the last time the euro was this weak 20 years ago, nobody is coming to the common currency’s rescue. Reaching parity—when two currencies are equal in value—is largely symbolic for investors, and is expected to have a limited impact on financial markets. But a weak euro does affect the region’s economy. It drives up the cost of imports and fans Europe’s already high inflation rate while making what Europe exports cheaper in international markets.
4. U.S. Retail Sales Rose 1% in June — consumers spent more last month across a range of goods that also surged in price, including gasoline, groceries and furniture. They also spent more at restaurants, as dining out became more expensive. Recent economic figures paint a mixed picture on the state of the economy, fueling an uncertain outlook and growing fears that a recession is looming. The Federal Reserve is also under pressure to raise rates aggressively to bring down high inflation. Manufacturing output fell for the second straight month in June, the Fed said Friday. Consumer sentiment in early July held near the lowest level on records, with nearly half of surveyed consumers blaming inflation for eroding their living standards, the University of Michigan’s index of consumer sentiment said. Home construction is also slowing.

The week ahead — Economic data from Econoday.com:

“Amateurs think about how much money they can make. Professionals think about how much money they could lose.” –Jack Schwager

1. Latest Fed Minutes Could Bolster Bets for 75 Basis-Point Hike in July — Chair Jerome Powell has said the Fed could hike by either 50 basis points or 75 basis points in July. He made the remarks at a June 15 press conference after policy makers raised rates by 75 basis points in the largest hike since 1994. Updated quarterly projections of the 18 policy makers show the median participant on the Federal Open Market Committee sees rates rising to 3.4% at year’s end and 3.8% next year, from a current target range of 1.5% to 1.75%.
2. Mortgage Rates Fall by Most Since 2008 on Recession Fears — the 30-year fixed-rate mortgage averaged 5.3% for the last week, according to according to data released by Freddie Mac. The drop in rates, alongside a a 5.4% drop in mortgage applications for the week ending July 1, reveals a broader cooling in the housing market.
3. Crypto Broker Voyager’s Marketing on Safety of Customer Accounts Draws FDIC Scrutiny — Voyager Digital Ltd. VOYG 0.00%▲ marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure. Voyager froze all activity, including withdrawals on $350 million in customer deposits that are stored at Metropolitan Commercial Bank, a small New York bank. Voyager said customers would be able to access those dollars after “a reconciliation and fraud prevention process is completed.” Still, some customers online said they were only just learning their deposits weren’t insured by the Federal Deposit Insurance Corp. in the way they thought. Voyager had marketed the accounts as protected by that national safety net, an attractive pitch in the volatile world of cryptocurrency.
4. U.S. Added 372,000 Jobs in June — the U.S. economy added 372,000 jobs in June, the Labor Department said Friday. Hiring gains last month held near the previous three months, when companies added an average of nearly 400,000 workers, but slipped from higher totals early in the year. Employers hired across industries, with the government the only major category to shed jobs in June. Hiring continued in industries vulnerable to interest-rate increases and shifting consumer habits. For instance, construction firms, susceptible to a faltering housing market and higher mortgage rates, added jobs last month. Transportation and warehousing companies hired workers despite a spring pullback of consumer spending on goods. The strong employment figures released Friday keep the Federal Reserve on track to raise interest rates by 0.75 percentage point at its meeting later this month to cool high inflation.

The week ahead — Economic data from Econoday.com:

“In my view, the greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness and defensiveness. And I believe the aggressiveness/defensiveness balance should be adjusted over time in response to changes in the state of the investment environment and where a number of elements stand in their cycles.” ― Howard Marks

1. Russia Defaults on Foreign Debt for First Time Since Communist Revolution — the Russian government was unable to compensate creditors on about $100 million of interest denominated in dollars and euros after a 30-day grace period following the May 27 deadline expired. Although President Vladimir Putin’s administration has the funds, reserves at Russia’s central bank are frozen and the biggest commercial banks are unable to trade in international markets under sanctions following Moscow’s invasion of Ukraine in February. Bondholders themselves will probably want to wait before formally starting default proceedings in the hope of being paid back after the war is over. Declaring default now would force Russia to pay back the principle on the loans immediately, but the same sanctions preventing interest payments would also stop those payments as well.
2. U.S. Bans Russian Gold Imports, Blacklists State-Owned Rostec — the U.S. has banned imports of Russian gold, broadening sanctions against the country following the Kremlin’s invasion of Ukraine in February, the U.S. Treasury Department said Tuesday. The Treasury on Tuesday also blacklisted 70 groups, many of which the U.S. said are critical to Russia’s defense industrial sector, including state-owned defense conglomerate Rostec, as well as 29 Russians. The official ban on new imports of Russian gold comes as Moscow’s invasion of Ukraine continues into its fourth month. The U.S. and the U.K. announced the move on Sunday during a Group of Seven meeting in the Bavarian Alps, with the rest of the G-7 joining the ban. Gold is Russia’s second most valuable export after energy and “rakes in tens of billions of dollars,” President Biden tweeted.
3. Powell Says Fed Must Accept Higher Recession Risk to Combat Inflation — Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than about the possibility of raising interest rates too high and pushing the economy into a recession. Mr. Powell said the central bank had to raise rates rapidly, even if that raises the risk of recession, to avoid a worse danger for the economy—of higher inflation becoming entrenched. He said the Fed didn’t have the luxury of moving rates up gradually because of concern that the recent period of high inflation may lead consumers and price setters to expect elevated prices to persist. Central banks across the globe are in a hurry to raise interest rates amid surging price pressures. Rising fuel costs and supply-chain disruptions from Russia’s war against Ukraine have sent prices higher in recent months. In the U.S., such increases are adding to inflation that was already high as demand surged last year from the reopening of the economy and aggressive government stimulus.
4. Markets Post Worst First Half of a Year in Decades — Accelerating inflation and rising interest rates fueled a monthslong rout that left few markets unscathed. The S&P 500 fell 21% through Thursday, suffering its worst first half of a year since 1970, according to Dow Jones Market Data. Investment-grade bonds, as measured by the iShares Core U.S. Aggregate Bond exchange-traded fund, lost 11%—posting their worst start to a year in history.
Stocks and bonds in emerging markets tumbled, hurt by slowing growth. And cryptocurrencies came crashing down, saddling individual investors and hedge funds alike with steep losses. investors seem to be in agreement about only one thing: More volatility is ahead. That is because central banks from the U.S. to India and New Zealand plan to keep raising interest rates to try to rein in inflation. The moves will likely slow down growth, potentially tipping economies into recession and generating further tumult across markets.

The week ahead — Economic data from Econoday.com: