In 2022, Sweden’s central bank undertook an aggressive interest rate hiking cycle that ricocheted through the property market.
JONATHAN NACKSTRAND / Contributor / Getty Images
Sweden’s property prices are facing a serious drop as the country’s central bank governor warns of lofty household debt levels.
House prices in Sweden have risen fairly reliably over the last decade. This has been buoyed by ultra-low interest rates in a system where around half of people’s mortgages are financed with variable rates and many of the rest are on short-term fixed rates.
But now property prices are tumbling. And this downturn is not surprising given the “dysfunctional” nature of the market, according to Stefan Ingves, the outgoing governor of Sweden’s central bank, the Riksbank.
“I’ve persistently time and time again said that the debt level in the household sector is just way, way too high and there will be a day of reckoning and eventually rates will go up, and now rates have gone up,” Ingves told CNBC’s “Squawk Box Europe” in an exclusive interview Tuesday.
“What you see happening now is almost exactly what you would expect to see happening, and that is that households have to pay more and the interest rate sensitivity … is much higher,” Ingves added, which makes interest rate payments higher for a huge number of Swedish households.
The pandemic effect
During the Covid-19 pandemic, house prices across Europe continued to rise, and Sweden was no exception. Demand for property skyrocketed as working from home and a preference for domestic vacations prompted people to upsize their spaces.
On average, house prices were up as much as 30% compared to the pre-pandemic level of January 2020, according to Nordea Bank, as the Riksbank started purchasing mortgage bonds, trying to bring rates down and adding fire to an already hot housing market.
But now prices are falling, dramatically.
“As of November we are seeing prices nationally in Sweden fall 13% from the peak in February. That’s the largest downturn on the housing market since we had a big economic crisis in the nineties,” Gustav Helgesson, an analyst at Nordea, told CNBC.
Home prices fell by 15% between the peak in March and November of last year, according to financial services company Valueguard, as reported by Nordic corporate bank SEB.
Central bank rate hikes
In 2022, Sweden’s central bank undertook an aggressive interest rate hiking cycle that ricocheted through the property market.
In February, the Riksbank signaled its policy rate would remain unchanged at zero, and predicted an eventual increase for the second half of 2024. But in the bank’s next monetary policy statement just three months later, the rate was raised to 0.25%.
“They really just shifted from that meeting to the next one in April and started their hiking cycle,” Helgesson told CNBC.
Rates continued to increase throughout 2022, going from 0.25% to 0.75% in July, to 1.75% in September and 2.5% in November.
“This took many households by surprise … and I think that Swedish households … have been struggling to adjust to this cycle and foresee these very quick and dramatic rate hikes from the Riksbank,” Helgesson said.
Emil Brodin, an economist from the National Institute of Economic Research, said the extent of the rises were “a bit more than people expected” and that it had “gone more quickly than people thought.”
Helgesson characterized the change as a correction, rather than a bursting bubble, “but it is a painful and very fast correction,” he added.
Thomas Veraguth, head of global real estate strategy for UBS Wealth Management, described the correction as “a natural adjustment that is mainly explained by macroeconomic factors.”
20% drop in 2023?
A further policy rate increase is anticipated for February, with the benchmark widely speculated to hit 3%, leading economists to predict a further downturn in property prices.
Nordea Bank estimates a 20% drop in home prices from peak to trough.
“This is as a direct consequence of the Riksbank’s increased interest rate. They’ve increased from 0% to 2.5% and we expect them to continue to increase the policy rates to 3% in February,” Helgesson from Nordea told CNBC.
Handelsbanken also anticipates a dip in prices.
“Our present forecast is that housing prices will continue to fall over the coming months and stabilize only when mortgage rates have peaked during the spring,” Christina Nyman, head of economic research and chief economist and Helena Bornevall, senior economist, at Handelsbanken, said in emailed comments to CNBC.
The National Institute of Economic Research also expects a further drop in the next couple of months that will settle later in the year.
“We expect the prices to continue declining throughout the first half of 2023 and then a stabilization of the prices, which is based on the interest rates not moving further up. So basically once the interest rate is stabilised, we don’t expect prices to continue declining,” Brodin said.
But there is downside risk to the 20% estimate, according to the chief economist of SEB, Jens Magnusson.
“We do expect [house prices] to drop a few more percentage points … So it could go from 20% to 25% perhaps, but if that happens that would mean that it’s pretty much the pandemic uptick that is being reversed,” Magnusson told CNBC.
Sweden isn’t the only European country experiencing a plunging property market post-pandemic, with some economists forecasting a similar downturn of between 20% and 25% in Germany.
A return to pre-pandemic figures
The dip in the market is a correction that puts Swedish property back to its pre-pandemic state, according to some economists.
“We had about 20% increases during those two pandemic years, so obviously that is the first thing that will go now and I expect pretty much all of that to disappear and to decrease,” Magnusson said.
“As of now prices are still about the level at which we entered the pandemic,” Brodin told CNBC. “Basically the increase in house prices during the pandemic is erased,” he added.
But the outgoing Riksbank governor signaled that the bumpiness in Sweden’s housing market stemmed from more fundamental issues than just a pandemic-induced fluctuation.
“We have not been hiding anything on the side of the central bank in the structural difficulties that we have in the housing market,” Ingves told CNBC.
“But at the same time, the political process has been such that there hasn’t been a willingness on the political side to sort out these issues and that’s why we are where we are,” he added.
The Government Offices of Sweden did not immediately respond to a CNBC request for comment.
Germany’s central bank is predicting a slowdown but no significant correction in the country’s property market despite warnings of overvaluation, according to a report published Thursday.
Claudia Buch, vice president of the Bundesbank, told CNBC’s Joumanna Bercetche: “We do see a slowdown in the price growth for residential real estate, but it’s not that the overall dynamic has reversed.”
“So we still have overvaluations in the market,” she said.
Some analysts, including at Deutsche Bank, have forecast a sharp decline for the sector. House prices have already declined around 5% since March, according to Deutsche Bank data, and they will drop between 20% and 25% in total from peak to trough, forecasts Jochen Moebert, a macroeconomic analyst at the German lender.
Buch said the central bank’s concern was the extent to which overvaluation was being driven by the loosening of credit standards by a very fast growth in credit residential mortgages.
“There we also see a slowdown,” she said. “So we don’t currently think that additional measures are taken to slow down the build-up of vulnerabilities in this market segment, but we do think we need to keep monitoring the market because we know that private households are very much exposed to mortgage loans, so that’s the biggest component in private household debt.”
The German market has a high share of fixed-rate mortgages so households are less vulnerable to rising interest rates than in some other countries, she continued.
“Of course the risk doesn’t disappear, it’s still in the system, but this exposure to interest rate risk is largely with the financial sector, the banks who’ve done that lending with regard to mortgages.”
The Bundesbank’s Financial Stability Review for 2022 highlights other issues, including deteriorating macroeconomic conditions and the slowdown in economic activity, increases in energy prices and the fall in real disposable income.
It describes the German economy as at a “turning point” following price corrections in financial markets, which have led to write-downs on securities portfolios, increased collateral requirements in futures markets and increased risks from corporate loans.
It says there has been no fundamental reassessment of credit risk in German banks so far but says its financial system is “vulnerable to adverse developments.”
“The message is very clear, we need a resilient financial system, we need to keep building up resilience over the next period of time,” Buch told CNBC.
Additional reporting by Hannah Ward-Glenton
Stocks on Wall Street closed broadly higher Tuesday, as solid company earnings helped lift several retailers ahead of the Thanksgiving holiday in the U.S.
The S&P 500 rose 1.4%, more than making up for its losses last week. The Dow Jones Industrial Average rose 1.2% and the Nasdaq composite gained 1.4%.
All the company sectors in the benchmark S&P 500 index rose, with technology stocks driving much of the rally. Chipmaker Nvidia rose 4.7%.
Financial and health care stocks also helped lift the market. Charles Schwab rose 1.6% and Pfizer added 1.9%.
Energy stocks notched the biggest gain as the price of U.S. crude oil rose 1.5%. Chevron rose 2.6%.
“Yesterday’s slow sell-off of energy was overdone,” said Jay Hatfield, CEO of Infrastructure Capital Advisors. “So you’re getting a bounce back in energy and that’s really leading the market.”
Long-term Treasury yields fell. The yield on the 10-year Treasury, which influences mortgage rates, slipped to 3.77% from 3.84% late Monday.
“When rates go down it’s great for all stocks,” Hatfield said.
The S&P 500 rose 53.64 points to 4,003.58. The Dow gained 397.82 points to 34,098.10. The tech-heavy Nasdaq climbed 149.90 points to 11,174.41.
Smaller company stocks also got a boost. The Russell 2000 rose 21.20 points, or 1.2%, to 1,860.44.
Investors have very little news to review this week, but several retailers and technology companies are closing out the latest round of corporate earnings with their financial results. Best Buy surged 12.8% after the electronics retailer did better than analysts expected and said a decline in sales for the year will not be as bad as it had projected earlier.
Dell Technologies rose 6.8% after the computer maker reported strong third-quarter profit and revenue. Zoom Video slumped 3.9% after giving investors a weak profit and revenue forecast.
Several retailers made particularly strong gains following solid financial results. Abercrombie & Fitch surged 21.4% and American Eagle jumped 18.2%.
Nearly every company in the S&P 500 has reported their latest financial results, according to FactSet, and the results have been mixed. Companies in the index have reported overall earnings growth of about 2%, but have also issued various warnings about weaker consumer demand and crimped sales as inflation continues squeezing consumers.
Inflation and the Federal Reserve’s fight to tame it remains the main concern for Wall Street. The central bank on Wednesday will release minutes from its latest policy meeting, potentially giving investors more insight into its decision-making process.
Wall Street has been hoping that the central bank might ease up on its aggressive rate increases. Its benchmark rate currently stands at 3.75% to 4%, up from close to zero in March.
The Fed has warned that it may have to ultimately raise rates to previously unanticipated level to cool the hottest inflation in decades. That strategy raises the risk that it could go too far in slowing economic growth and bring on a recession.
Worries about a recession continue hanging over the global economy and markets.
The Paris-based Organization for Economic Cooperation and Development is forecasting modest economic growth globally this year and more tepid growth in 2023. Russia’s war in Ukraine continues threatening energy supplies and key food commodities including wheat. A resurgence of COVID-19 cases in China continues threatening the world’s second-largest economy and global supply chains.
“In 2023, we expect less pain but also no gain,” stated a report from Goldman Sachs looking ahead to the new year.
The investment bank expects inflation and high interest rates to essentially flatten out corporate earnings and hold the broader stock market at its current levels, with the S&P 500 ending 2023 where it currently sits at around 4,000 points.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.
Weak quarterly results from several big technology companies weighed on stocks Wednesday, leaving major indexes mixed on Wall Street.
The S&P 500 fell 0.7% after shedding an early gain, while the tech-heavy Nasdaq composite dropped 2%. The lower finish ended a three-day winning streak for both indexes.
The Dow Jones Industrial Average ended just barely in the green after having been up 1.1%, thanks in part to a big jump in Visa.
Smaller company stocks far outpaced the broader market, lifting the Russell 2000 index by 0.5%.
“A handful of very large companies are weighing on the indexes,” said Willie Delwiche, investment strategist at All Star Charts. “The more exposed you are to those mega-cap tech stocks the more you’re down today, and the less exposed you are the less you’re down.”
The S&P 500 fell 28.51 points to 3,830.60. The Nasdaq fell 228.12 points to 10,970.99. The Dow rose 2.37 points to close at 31,839.11. It had briefly been up by more than 335 points. The Russell 2000 added 8.18 points at 1,804.33.
Google’s parent company, Alphabet, slumped 9.6% after it reported disappointing third-quarter financial results as advertising sales weakened. Weak ad sales are threatening other tech and communications companies. Music streaming service Spotify fell 13% after it reported a bigger third-quarter loss than Wall Street expected.
Microsoft slid 7.7% after it reported disappointing growth for its cloud computing company, while profits fell along with PC sales. Chipmaker Texas Instruments fell 2.6% after giving investors a discouraging forecast for the current quarter.
Facebook’s parent company, Meta, fell 10.8% in after-hours trading following the release of its third-quarter earnings, which fell short of analysts’ forecasts, according to FactSet. The stock fell 5.6% in regular trading.
Stocks with huge valuations, such as Microsoft, Meta Platforms and Google parent Alphabet, can have a big effect on market indexes.
In the S&P 500, the slide in technolgy and communications stocks outweighed gains elsewhere in the benchmark index, including in health care and energy companies.
Traders bid up shares in companies that delivered improved quarterly results Wednesday.
Visa rose 4.6% after reporting strong financial results and raising its dividend. Norfolk Southern gained 2.9% after reporting a surge in profits on an increase in shipping rates.
Outside of earnings, Mobileye Global, Intel’s self-driving unit, rose 38% in its market debut.
Several other big companies are on deck to report earnings this week. Apple and Amazon report results on Thursday, along with industrial bellwether Caterpillar and McDonald’s.
The tech-stock losses also overshadowed another slide in Treasury yields, which helped boost stocks earlier in the week as they pulled back from their multiyear highs.
Bond yields have been declining amid speculation among investors that the Federal Reserve may begin easing up on its aggressive pace of interest rate increases as soon as this year. Gains in those rates have sent mortgage rates sharply higher this year.
The yield on the 10-year Treasury fell to 4.01% from 4.10% late Tuesday. The two-year yield fell to 4.42% from 4.48%.
Investors are mainly focused on earnings this week, but are waiting for several economic updates as they try to get a better picture of how inflation is impacting businesses, consumers and the Fed’s plans for interest rate increases.
The government will release its first estimate on third-quarter gross domestic product on Thursday. The U.S. economy is already slowing down and actually contracted during the first half the year. On Friday the government will also release more data on personal income, consumption and spending.
The latest economic data is being closely watched for any signs of a slowdown as Wall Street tries to determine if and when the Fed might ease up on its interest rate increases. The central bank is expected to raise interest rates another three-quarters of a percentage point at its upcoming meeting in November. But traders have grown more confident that it will dial down to a more modest increase of 0.50 percentage points in December, according to CME Group.
Investors have been concerned that the Fed could go too far with rate increases and cause a recession by slowing the economy too much.
Joe McDonald and Matt Ott contributed to this report.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.
Federal Reserve officials have spent the last week indicating rate hikes will continue in order to bring down rising prices — but this risks intensifying inflationary pressures, according to a Nobel Prize-winning economist.
“The real worry in my mind is, will they increase interest rates too high, too fast, too far?” Joseph Stiglitz told CNBC’s Steve Sedgwick Friday at the Ambrosetti Forum in Italy.
The Columbia University professor, author of “The Price of Inequality” and “Globalization and Its Discontents,” said that while there did need to be an adjustment from the zero or near-zero interest rate policy that has prevailed since 2008, there were three reasons an aggressive Fed course could stoke inflation.
The first is that the overwhelming source of inflation, by Stiglitz’s analysis, is supply-side disruptions leading to higher prices in oil and food, even causing a shortage of baby formula.
“Will raising interest rates lead to more oil, lower prices of oil, more food, lower prices of food? Answer is clearly not. In fact, the real risk is it will make it worse,” he told CNBC at the economic conference held on the shores of Lake Como.
“Why? Because what we need to do is to make investments to relieve some of these supply-side bottlenecks that are causing such havoc on our economy. It’s going to make it more difficult.”
The second reason, Stiglitz said, was evidenced by the fact that margins for major corporations have been rising along with their input costs.
“They’ve not only been passing on the cost but passing it on even more. There’s a well-defined theory that points out that when interest rates go up, firms … take more advantage of raising prices today.”
“So raising interest rates in non-competitive markets may lead to even more inflation,” he said.
Finally, he continued, there is the potential for increasing costs in an important component of inflation: housing.
“You raise interest rates, it gets reflected in rents, and there’s a Federal Reserve study showing that,” he said.
The Federal Reserve raised its benchmark rate by 0.75 percentage points in both June and July.
In a speech on Aug. 26, Fed Chair Jerome Powell said that while higher rates, slower growth and softer labor market conditions would bring down inflation, that would also mean “some pain” for households and businesses.
Stiglitz had further concerns about the U.S. economy’s impact on citizens.
One was that interest rates will continue to be raised faster than house prices fall — “prices are remaining high, they’re not going to come down as fast as interest rates are going up and that’s going to increase the intergenerational divide in our society,” he said.
Another was that recent U.S. job market data, which on Friday showed nonfarm payrolls rose by 315,000 in August despite slowing economic growth, does not indicate as much strength as some have suggested.
“One indicator that they are not really capturing is what is going on with real wages, which normally go up when labor markets are tight,” he said.
Real wages refers to wages adjusted for inflation.
“Labor markets are very tight, prices of goods are going up, that should mean you compensate workers even more but that’s not happening,” Stiglitz noted.
“Real wages are going down, so that at least should make you worry,” he added.
Banks in Singapore raised housing loan rates in June, following the U.S. Federal Reserve’s decision to increase interest rates by 75 basis points in the same month to cool inflation — its most aggressive hike since 1994.
Nurphoto | Nurphoto | Getty Images
Homeowners in Singapore are starting to tighten their belts as they will soon face higher mortgages, thanks to rising interest rates.
The country’s three largest banks raised housing loan rates in June, following the U.S. Federal Reserve’s decision to increase interest rates by 75 basis points in the same month to cool inflation — its most aggressive hike since 1994.
DBS raised rates on its two- and three-year fixed packages to 2.75% per annum; OCBC increased its two-year fixed rate to 2.98%; and UOB its three-year fixed rate package to 3.08% per annum. Rates have been on the rise since late last year, when three-year fixed rates were at 1.15%.
Property experts are saying the increase in rates is not surprising.
A housing loan with a rate of about 2% interest is considered “super cheap,” said Christine Li, head of research for Asia-Pacific at Knight Frank.
Homeowners with an existing property would have “enjoyed two years of very low mortgage rates, and now it’s just the normalization (period from) two or three years ago,” she said.
But residents who own private properties and have their mortgages tied to a bank loan are starting to feel the pinch.
Tan, 34, who works in a software company and wanted to be referred to only by her last name, and her husband, 36, bought a condominium in 2021 for 1.75 million Singapore dollars ($1.26 million). They applied for a SG$1.31 million two-year fixed-rate mortgage from a local bank with 1.1% interest.
Tan said she initially felt relieved when she heard the news as they would not be affected immediately. But panic set in when she realized their mortgage could increase around the end of 2023 when their fixed-rate ends.
The couple currently pays SG$4,274 a month for their mortgage and expects it to “go up quite significantly,” she said.
“What we would have to do is cut back on spending on unnecessary things — [fewer] meals at restaurants, less shopping, and how much wine we buy on a monthly basis,” Tan said.
Two scenarios for public housing owners
The situation is similar for Singaporean owners of public housing apartments — known locally as HDB flats — whose mortgages are likewise tied to bank loans, rather than the country’s public housing authority.
Regine, 25, who works as a public affairs executive and wanted to be referred to only by her first name, belongs to the first group. She bought a SG$482,000 four-room resale apartment in 2020 with a five-year fixed rate package from DBS with 1.4% interest.
“We’re still early into our lease, so it is a relief that we locked in a good deal and that we are safe for the next few years,” Regine said. “Interest rates are crazy now.”
“The markets are very volatile now, so we’re hoping that interest rates will stabilize in the next five years and the bank rates will not be higher than HDB rates,” she added.
When asked about how the couple would be able to cope if interest rates remain high in the coming years, she said they would “still be very comfortable” as they did not spend above their means on the house.
Knight Frank’s Li estimated that Singapore residents who own public housing could see their monthly mortgages increasing by $200 to $300 with the current rate hike.
But flat owners who opted for a HDB housing loan instead of a bank loan may be in a better situation.
Their loan comes with 2.6% interest — lower than the bank loan packages.
Samantha Pradeep, 31, who owns a SG$380,000 five-room flat with her husband, said she felt at ease with their decision to opt for an HDB loan despite bank loan rates being “slightly more attractive” in 2017 when they purchased the house.
“It was a neck and neck fight between the bank and HDB loan five years ago, but it’s a lot more different now,” she said. “If we had taken a bank loan, it would have affected our finances quite greatly right now.”
Singapore introduced new measures in mid-December aimed at cooling the country’s red-hot private and residential property market. It raised taxes on second and subsequent property purchases, and imposed tighter limits on loans.
The government also said it will increase the supply of public and private housing to cater to the strong demand, the Ministry of National Development reported in the same month.
Across the border
In Malaysia, mortgage prices have been relatively stable.
The country’s central bank hiked interest rates on July 6 by 25 basis points, but property experts said the increase will not move the needle much on mortgage prices.
Ng Wee Soon, a Malaysian who owns two investment properties in Johor Bahru that cost about 500,000 Malaysian ringgit ($112,000) each, said the increase in mortgage loans may cost him “about $100 per property.”
People with multiple properties will have their cash outlay eaten into every month as mortgage rates rise, said Knight Frank’s Li. “But if the rental market is resilient … investment property owners are able to adjust the rental rates to have higher returns on rental yields.”
However, Ng said with Malaysia’s economy still recovering from the pandemic and the country’s housing surplus, he would rather “absorb the cost of higher mortgages, rather than raising rent.”
— CNBC’s Abigail Ng contributed to this report.
HARARE, Zimbabwe — Zimbabwe has launched gold coins to be sold to the public in a bid to tame runaway inflation that has further eroded the country’s unstable currency.
The unprecedented move was announced Monday by the country’s central bank, the Reserve Bank of Zimbabwe, to boost confidence in the local currency.
Trust in Zimbabwe’s currency is low after people saw their savings wiped out by hyperinflation in 2008 which reached 5 billion%, according to the IMF.
With strong memories of that disastrous inflation, many Zimbabweans today prefer to scramble on the illegal market for scarce U.S. dollars to keep at home as savings or for daily transactions. Faith in Zimbabwe’s currency is already so low that many retailers don’t accept it.
The central bank disbursed 2,000 coins to commercial banks on Monday. The first batch of the coins was minted outside the country but eventually they will be produced locally, according to the governor of the Reserve Bank of Zimbabwe, John Mangudya.
The coins can be used for purchases in shops, depending on whether the shop has enough change, he said.
“The government is trying to moderate the very high demand for the U.S. dollar because this high demand is not being matched by supply,” said Zimbabwean economist Prosper Chitambara.
“The expectation is that … there will also be moderation in terms of the depreciation of the local currency, which should have some kind of stabilizing effect in terms of pricing of goods,” he said.
Any individual or company can buy the coins from authorized outlets such as banks, according to an announcement by the country’s central bank.
People can buy the gold coins from authorized agents such as banks using the local currency or foreign currencies and purchasers can choose to keep the coins at a bank or take them home. Foreigners can only buy the coins in foreign currency, said the central bank.
Called Mosi-oa-Tunya, which in the local Tonga language refers to Victoria Falls, the coins “will have liquid asset status, that is, it will be capable of being easily converted to cash, and will be tradable locally and internationally. The coin may also be used for transactional purposes,” said the central bank. People holding the coins can only trade them for cash after 180 days from the date of buying, the bank said.
The coins, each weighing one troy ounce with a purity of 22 carats, can also be used as security for loans and credit facilities, said the central bank. The price of the coins will be determined by the international market rate for an ounce of gold, plus 5% for the cost of producing the coin. At the time of the launch Monday, the cost of Mosi oa Tunya coin was $1,824.
Internationally, gold coins are used in countries such as China, South Africa and Australia to hedge against inflation and as an investment opportunity, although they are not as widely used as currency as envisaged by Zimbabwe’s central bank, said Chitambara.
“For Zimbabwe we are in chronic hyperinflation so the expectation is that there will be a huge uptake of these gold coins,” he said. However, most Zimbabweans struggle with daily survival and won’t be able to buy them, he said.
“For the common man, there is not really much to benefit directly from this, especially if you don’t have any excess cash,” said Chitambara.
“Many people have no money for bread, let alone for savings,” he said. “The expectation is that indirectly it will benefit the ordinary person through moderating the prices.”
Companies with excess cash can find the coins useful to store value and also as an alternative investment asset, although individuals and companies are likely to continue preferring the dollar because “it is convenient and highly liquid,” he said.
Selling the coins in fast depreciating local currency could also result in “rent-seeking behavior, speculation and arbitrage within the economy,” as some could buy using local currency and then sell in dollars later, he said.
The fact that Zimbabwe’s central bank would have to buy the gold from miners of the metal such as informal artisanal miners could also present challenges and result in increased smuggling, analysts say.
“Gold deliveries in Zimbabwe have significantly recovered because of the appetizing U.S. dollar payments offered to artisanal miners,” noted securities firm Morgan & Co in a market intelligence report.
“However, should there be a disparity between the amount of U.S. dollars used to purchase the gold from miners and the U.S. dollars used to pay for the coins, this could squeeze the central bank and its intermediaries’ foreign currency reserves. If this ripples to artisanal gold miners, this could result in low deliveries to Fidelity Printers and increase gold smuggling activities,” noted the Morgan report. Fidelity Printers, a subsidiary of the central bank, is the country’s only authorized gold buyer.
Zimbabwe has substantial gold deposits and exports of the precious metal is one of the southern African country’s major foreign currency earners. Gold production improved to about 30 tons in 2021, compared to 19 tons in 2020, according to official figures. Small–scale producers such as poorly regulated artisanal miners contributed 19 tons of the gold delivered in 2021, according to official figures.
Gold smuggling has been rampant. The country is estimated to be losing about $100 million dollars worth of gold monthly to smuggling, home affairs minister Kazembe Kazembe has said. Smuggling is costing the country about 36 tons of gold annually, according to a report issued this month by the Center for Natural Resource Governance, a local natural resources watchdog. Legally all gold mined in Zimbabwe is supposed to be sold to the central bank, but many producers prefer to smuggle the gold out of the country in order to get payment in U.S. dollars.
Markets have been on a wild ride recently, swinging between gains and losses. However, the brutal selling has meant the S&P 500 is still in a bear market.
When asked whether markets have hit a bottom, Wall Street veteran Ed Yardeni said he doesn’t think “we’re gonna climb out of this thing very quickly, not in a fundamental sense.”
“I think investors have learned this year — ‘don’t fight the Fed,'” he told CNBC’s “Street Signs Asia” on Monday. The mantra refers to the idea that investors should align their investments with, rather than against, the U.S. Federal Reserve’s monetary policies.
What changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation.
Ed Yardeni
president, Yardeni Research
“For many years, the idea of don’t fight the Fed was if the Fed was going to be easy [on monetary policy.] You want to be long equities,” said Yardeni, president of consultancy Yardeni Research. “But what changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation. And that means that that’s not a good environment for equities on a short-term basis.”
‘Too late to panic’
With inflation soaring to new highs this year, the Fed raised interest rates by 75 basis points last week — its biggest since 1994 — and signaled continued tightening ahead. Fed Chair Jerome Powell said another hike of 50 or 75 basis points at the next meeting in July is likely.
However, the economy now faces the risk of stagflation as economic growth tails off and prices continue to rise.
Wall Street has tumbled in response to the Fed’s tightening and rapidly rising inflation. The S&P 500 last week posted its 10th down week in the last 11, and is now well into a bear market. On Thursday, all 11 of its sectors closed more than 10% below their recent highs. The Dow Jones Industrial Average fell below 30,000 for the first time since January 2021 this past week.
Yardeni said it “isn’t going to be over” till there are definitive signs that inflation, brought on by soaring food and energy prices, has peaked. Market watchers have also blamed rising prices on the Fed’s fiscal overstimulation of the economy amid the Covid-19 pandemic.
“We’ve got to see a peak in inflation before the market will be substantially higher,” he said, adding that point could come next year.
Still, Yardeni believes that markets “are kind of at an exhaustion stage” in the selling.
“At this point, it’s a little too late to panic. I think long-term investors are going to find that there’s some great opportunities here,” he told CNBC.
A recession that will ‘hurt the rich’
Rumblings of the possibility of a recession have been getting louder, as doubts surface about the Fed’s ability to achieve a soft landing. A bear market often portends — but doesn’t cause — a recession.
“This will be the first recession that hurts the rich probably for a pretty long while, more than it hurts the ordinary person on the street,” said Mark Jolley, global strategist at CCB International Securities.
“If you look at what’s happened to bond and equity prices and look at the combined decline in bond and equity prices, we are on track to have the worst year already of wealth destruction since 1938,” he told CNBC’s “Squawk Box Asia” on Monday.
As interest rates go higher, the value of people’s assets bought with borrowed money will fall, Jolley said, suggesting that mortgages are at risk.
“Anything in the economy that is leveraged and long, which is basically private equity, your collateral has gone down 20%,” he said. “Imagine what would happen to the banking system in any economy if your house prices fell by 20%.”