Inflation fears, gold up again, crypto crash

Week from 17 to 23 May 2021

Concerns about inflation have not dissipated. The University of Michigan consumer survey exhibited the highest expected year-ahead inflation rate last week. Consumer confidence in early May tumbled (Index of Consumer Sentiment down from 88.3 in April to 82.8) as real income expectations were the weakest in five years due to rising inflation. The U.S. producer price index corroborated such concerns with a +0.6% gain in April, double the +0.3% expected. For the 12 months, the PPI was up +6.1%. Fed minutes published on Wednesday stated that some officials now think that it might be appropriate to "begin discussing a plan for adjusting the pace of asset purchases" if the economic recovery intensifies.

In such an environment, stock markets struggled for traction while gold was one of few assets standing tall, fulfilling its traditional role as an inflation hedge. Its spot price, reflective of real-time trades in bullion, jumped to $1,881.25 (up +2.05% week-over-week). Analysts at JP Morgan Chase have recently reported that large institutional investors were dumping Bitcoin in favour of the yellow metal.

Major Indexes Close Mixed

The Dow Jones Industrial Average lost 120 points over the week, or -0.35%. The S&P 500 was down -0.43% while the Nasdaq Composite gained +0.31%. Among the S&P sectors, falling oil prices (WTI down -2.74%) dragged energy stocks lower (-2.84%). An Iran nuclear deal might indeed result in a new wave of crude supply while Covid-19 curbs in Asia may be an early-warning sign for depressed demand. Industrials (-1.70%), materials (-1.42%) and consumer discretionary (-1.22%) also stifled gains in the broader market. By contrast, real estate (+0.91%), health care (+0.74%), utilities (+0.31%), information technology (+0.13%) and consumer staples (+0.07%) finished in positive territory. As regards the latter, it is worth noting that shares of the Swedish alt-milk maker (Oatly) soared +32% in company’s public market debut on Nasdaq. Investors bet on surging demand for plant-based food alternatives.

Major European equity indexes treaded water (MSCI EMU: +0.27%, DAX 30: +0.14%, CAC 40: +0.02%). In Asia, the Shanghai Composite edged down -0.11% but the Nikkei rose +0.83%. Indian stocks proved more resilient than a week ago (+3.39%). The MSCI Taiwan followed suit (+3.29%) while Korea’s Kospi was almost flat (+0.1%).

Lull on the Interest Rate Front

U.S. Treasuries were relatively calm. The 10-year yield remained unchanged at +1.63%. The same was true in Europe after a tough period last week. The benchmark German Bund yield traded at -0.13%.

Calm was back in credit markets too. Investment grade corporate bonds edged down -0.04% in Europe. They rose +0.27% in the U.S. High-yield bonds hovered around their closing price on Friday, May 14 (+0.08% in Europe, -0.09% in the U.S.). Emerging debt edged up +0.11% in local currencies.

Cryptocurrencies Still Under Heavy Pressure

It was another hectic week for Bitcoin and Ethereum amid China’s hard stance on cryptocurrency and account liquidations. Bitcoin leverage trading led many private investors to ruin after a wild trading session Wednesday that saw the price of BTC swing by about $10,000. The meltdown was so intense that the cryptocurrency dropped more than 25% over the week, and more than 47% since hitting a record high in mid-April.

To make matters worse, Fed Chair Jerome Powell added that cryptocurrencies, stablecoins and other innovations "may carry potential risks to their users and to the broader financial system." As a result, the central bank is thinking about an appropriate regulatory and oversight framework. Last but not least, the U.S. Treasury Department announced Thursday new crypto tax reporting requirements for transfers of at least $10,000. As stressed in the Treasury report, the reason behind this decision is that “cryptocurrency already poses a significant detection problem by facilitating illegal activity including tax evasion.”

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