A summer vacation has come to the markets, with low liquidity and dull days when nothing happens. But if it does, it quickly breaks the dam. So far, we've been lucky, and August has been without surprises. This week, the US market fell slightly, losing about 30 points, and will open on Friday at 4468 points. So far, it's just a planned correction, and a very smooth one at that. It will not disturb those who are on vacation. The markets were most worried about China this week. Well, some were worried, and some were happy. Even Biden, who is rather pleased, called China a ticking time bomb, speaking specifically about the economy. He was probably rubbing his hands with pleasure the moment journalists didn’t see him.
Moreover, the recession in the United States that everyone has been talking about for so long has not come, leaving good chances for Grandpa Joe to win the election for the second time. In addition, the Republicans are likely to send him the most convenient opponent who scares the whole civilized world – Donald Trump. Who still spends all his campaign funds on lawyers.
In China this week, the traditional problems of the real estate market, local government overleveraging, and high (very high) youth unemployment were joined by difficulties in foreign trade, where exports and imports fell sharply, as well as deflation. The latter sounds the worst.
It is not for nothing that the Communist Party comrades, in the spirit of their fathers and grandfathers, who chased sparrows during the Cultural Revolution and succeeded, forbade analysts to use this word. The analysts obeyed, looking for suitable substitutions not to utter the word that must not be named. It would be too direct an association with Japan. Japan in the late 1980s also threatened to become a world leader, but ended up with a lost decade amid deflation and the problem of an aging population. This is precisely the Chinese situation. After all, China has also noticed the risk of depopulation. Still, the Chinese are in no hurry to reproduce, and it is not so easy to organize migration to a communist paradise. The problem is that Japan did not have a dictator and his fellow party members at the helm, making China's prospects worse in the long run than the Land of the Rising Sun. No wonder Biden is rubbing his hands together.
The situation in China's satellite country, which has been actively pegging its currency to the Chinese yuan, continues deteriorating. The yuan has not become a freely convertible currency, but it is very good at devaluing. The ruble continues to fall, coming very close to the 100 rubles per dollar mark, which is rotting and not self-destructing. Active capital outflows exert the primary pressure on the ruble. Zeroing out the trade surplus certainly helps. However, the ruble's decline poses little threat to the Russian economy in itself, and has more of a psychological effect. However, if political decisions are made, the consequences will reach the real economy. After all, the Orthodox Glazyev, together with Dugin, has long since developed the concept of Russian world banking, the introduction of which will be a holiday for Ukrainians. In the meantime, the Central Bank is keeping the Russian economy in a hedgehog's grip, leading to very interesting budgetary developments. Namely, there will be budget cuts even against the backdrop of a sharp increase in military spending. It needs to be clarified what they are cutting so actively, but it is unlikely that those being cut off from financial flows are very happy.
The Ukrainian segment of external debt is also in the holiday season. In July, Ukraine experienced deflation. So far, only in July, driven by sunflower oil prices, which have fallen sharply on the global market, and vegetable prices, which have been falling relative to themselves during the winter period, when power outages caused prices to spike. As a result, Ukraine's annual inflation rate dropped to 11%, sending a message to skeptics and Hungarians alike. Promising further rate cuts by the National Bank and thus increasing the attractiveness of government bonds even more, leaving only the question as to whether or not the NBU will move towards at least some kind of floating exchange rate in the coming months. Or currency liberalization, releasing at least some money from the country.
In any case, even if cautious currency liberalization happens and the NBU lets the hryvnia float on a short leash, not exceeding 10%, according to the NBU's own forecasts, the yields on government bonds, which are still reluctantly declining, look very attractive. Moreover, the NBU's reserves have reached another historic high, reaching $41.7 billion. And the higher they are, the harder it will be for Biden to ask the Republicans not to cut support for Ukraine. But the main thing is not to show Congress the statistics of luxury car purchases in Ukraine, which correlates very strongly with the amount of Western aid. In the meantime, Biden has asked Congress for assistance for the 4th quarter of 2023 (including net military support of $9.5 billion), and the processes there will be a demo for voting on aid for 2024.
P. S. Optimism is a belief that leads to achievement. Nothing can be done without hope and confidence.
Helen Keller