What has happened?
The euro has fallen to the same value as the US Dollar, with 1 EUR being worth exactly 1 USD, according to many forex traders who have been keeping a close eye on the market. This is big news as this is the first time their values have been equal in 20 years.
Why has the euro lost value?
One of the main reasons that the euro has lost its value is the conflict in Ukraine. Russia, which invaded Ukraine at the end of February, is one of the main suppliers of gas to Europe. However, it’s thought that Russia will retaliate against western sanctions by completely cutting off the gas supply to Europe.
This uncertainty amid rumours that the 10-day scheduled shutdown of the Nord Stream 1 could be made permanent has contributed to the energy crisis in the UK.
What does this mean for Europe?
Unfortunately for us in Europe, it’s not good news. With many countries already on the cusp of a recession, the euro losing its value isn’t going to help the situation. The fall of the euro confirms the fact that current political situations and the energy crisis are going to have a knock-on effect on our bank accounts.
What does this mean for the pound?
Unfortunately, the pound is also unable to escape the dip in the European economy. So far, the pound has reached its lowest rate since March 2020, when the pandemic hit.
In practical terms, this means that imports such as food will become more expensive, pushing our monthly food bills upwards. We’ll also see an increase in commodities such as petrol. For those going abroad on holiday this summer, it’s not good news either. With a weaker pound, families will get less for their money when buying abroad.
What to expect next?
Although it may seem like a lot of doom and gloom, we haven’t entered into a recession yet. So, there’s always the potential that the times of hardship will pass, and the currency values will climb back up to their levels before conflict breaks out in Europe.
However, on the other end of the scale, there is also the possibility that the pound and euro will continue to fall, leading to a full-blown recession. On the other hand, the dollar has remained strong throughout, so it’s clear that the recession is just Europe-wide.
What will happen for certain? Only time will tell.
In April, regular pay excluding bonuses was down 3.4% after inflation. This marked the largest drop since records began in 2001, according to data from the Office for National Statistics (ONS).
ONS figures also revealed that, for public sector workers, real pay is falling by almost 6% a year.
Tony Wilson, director of the Institute for Employment Studies, commented: “This is really grim news on pay and is only likely to get worse. Despite the tightest labour market on record, nominal pay is broadly flat meaning that rocketing inflation is leading to the largest cuts in real pay in at least two decades [...] The picture is particularly bad for public sector workers.”
The figures come as inflation spiralled to a 40-year high of 9%, due in part to soaring energy and fuel prices amid the Russia-Ukraine war. The figures further emphasise the cost of living crisis that people in the UK are facing as pay increases are swallowed up by rapid inflation.
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In its most recent Global Economic Prospects report, the World Bank said it expects global economic expansion to drop to 2.9% this year from 5.7% in 2021. This is 1.2 percentage points lower than the 4.1% predicted in January.
The report then predicts growth to maintain this level from 2023 to 2024 while inflation remains above target for most countries, which points to stagflation risks.
“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank President David Malpass commented.
According to the report, growth in advanced economies will likely drop sharply to 2.6% in 2022 from 5.1% in 2021.
Meanwhile, expansion in emerging markets and developing economies is expected to drop to 3.4% in 2022 from 6.6% in 2021.
“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality,” Malpass said.
Western sanctions have frozen approximately half of Russia’s gold and foreign exchange reserves, which stood at around $640 billion prior to Moscow’s attack on Ukraine at the end of February.
The Bank of Russia said this move by the West, as well as discussions about a potential seizure of the frozen part of reserves, would prompt other central banks, such as those in the Middle East and Asia, to reconsider their savings strategies.
"One could expect an increase in demand for gold and a decline in the US dollar's and the euro's role as reserve assets," the Russian central bank said in a report on financial stability.
"One of the results of the imposed sanctions restrictions for the foreign exchange market was the tendency to increase the use of currencies alternative to the US dollar and the euro.”
The drop has sent the retailer’s shares down 2%.
Across the board, companies in the United States have been struggling with higher costs due to supply chain disruptions, worsened by the ongoing conflict in Ukraine and renewed Covid-19 lockdowns in China.
Costco plans to up prices in certain areas to combat record-high inflation. But, despite this challenge, the retailer still succeeded in posting quarterly profit and revenue that topped estimates. In the quarter which ended May 8, Costco’s total revenue increased 16% to $52.60 billion, compared with estimates of $51.71 billion.
Additionally, Costco’s efforts to keep gas prices several cents lower than the national average have boosted sales and memberships.
President Putin’s demand for so-called “unfriendly” nations to pay for gas in Russia’s home currency came as a response to sanctions imposed against the nation by several countries. The EU has resisted Putin’s demand as meeting them would breach sanctions.
"Europeans can trust that we stand united and in full solidarity with the member states impacted in the face of this new challenge. Europeans can count on our full support," European Commission President Ursula von der Leyen said in a statement.
Following Russia’s actions, the FTSE 100 fell 0.4% after opening. Meanwhile, the CAC was down 0.5%, and the DAX dropped 0.6%.
In response to its Russian gas supply being cut off, Poland has said it will accelerate the construction of its new floating liquefied natural gas terminal.
The New York-based bank said profits fell 42% from a year earlier to $8.28 billion, or $2.63 per share. Adjusted earnings of $2.76, which excludes the 13-cent impact of the Russia-Ukraine conflict, go above the $2.69 estimate of analysts surveyed by Refinitiv. Revenue, meanwhile, was down 5% to $31.59 billion, surpassing analyst predictions for the quarter.
The quarter illustrates how rapidly events in Europe have shifted the industry’s outlook. In 2021, JPMorgan Chief Executive Jamie Dimon said he expected a long-running economic expansion, with banks profiting from billions of dollars in loan loss reserves being released. Fast-forward a year, Dimon is warning of the possibility of a recession amid spiralling inflation and ongoing fighting in Ukraine.
“We remain optimistic on the economy, at least for the short term,” Dimon commented. “Consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”
Worsening global supply chain disruption is one of the conflict’s most significant consequences for businesses. In fact, Moody’s has highlighted that the war in Ukraine has replaced COVID-19 as the most considerable risk confronting the global supply chain. Of course, this comes as no great surprise, considering that approximately 15,000 China-Europe freight train trips were made in 2021, with many of these trade routes running across Russia and Ukraine.
The disruption and rerouting of these trade routes due to the war is leading to further chaos across the supply chain and this has massive implications for SMEs, which face tremendous supply chain challenges. Even before the war, almost two-thirds of UK SME manufacturers had already reported concerns that material supply shortage could impede their output. The conflict is serving to exacerbate these problems.
The need for supply chain redesign imminent
Tackling crippling supply chain challenges would require businesses to shift away from existing models that relied on lean inventories and just-in-time delivery. With this in mind, many companies are now looking at ways to build up and store inventory reserves to prepare for supply chain shocks in the future. The difficulty, however, is that while this mitigates the impact of disruptions to future production and improves supply chain resilience, it ties up valuable working capital. Moreover, these "safety stocks" can also risk obsolescence due to technological advancements or changing customer demands, which leads to precious resources, waste, and lost revenue, if not managed carefully.
At the same time, larger organisations have begun to scrutinise their entire network of suppliers to identify potential critical bottlenecks. With the ongoing supply chain disruption, excessive reliance on specialist suppliers or suppliers in the exact locations created a knock-on effect that delayed production down the line. Unfortunately, this puts everyone in the supply chain at greater risk and consequently, these organisations are expected to diversify their network to strengthen their resilience.
The push for diversification presents both an opportunity and a challenge for SMEs.
While more MNCs are expected to decentralise their supply network to mitigate risk exposure, they will also likely set stringent criteria for SMEs to demonstrate strong business and financial fundamentals.
The need for liquidity and risk mitigation through trade financing
To assemble a well-stocked inventory and devise a strategy to sustain production during future disruptions, SMEs need to identify and unlock alternative funding sources to ensure resilient cash flows.
Many are already suffering from high debt burdens due to the pandemic and, in addition, the war and the subsequent sanctions have caused soaring inflation and surging energy prices, exacerbating their financial challenges. This dramatically raises SMEs’ operational costs and worsens their liquidity crunch.
The uncertainty of macroeconomic recovery due to the war in Ukraine has also led to investors remaining cautious and banks focusing their funding on more conservative, established relationships.
The "flight to quality" has left many worthy businesses — particularly SMEs — with limited options for trade finance. Smaller companies are often unable to prove creditworthiness or show additional collateral required by banks to mitigate the risk of SME lending under the traditional banking system. Some may also resort to self-financing, which results in more significant cash flow challenges in a sustained crisis.
A recent survey Asian Development Bank (ADB) showed the global trade finance gap grew to an all-time high of US$1.7 trillion in 2020, a 15% increase from 2018. Despite the universal acknowledgement that SMEs are vital to economic prosperity and macroeconomic growth, they accounted for 40% of rejected trade finance requests. Without the short-term liquidity and risk mitigation provided by trade finance, buyers and sellers will be impeded in their efforts to tap into traded goods for recovery.
One option SMEs can consider is a non-recourse approach for off-balance-sheet financing, which essentially takes away the burden of loans. Suppliers can leverage platforms, such as Incomlend's global invoice financing marketplace, to ask for early payment from their customers via a third-party financier. In effect, they are selling their invoice and obtaining finance without risk. It reduces the risk of late payments and bad debts – an option that would not be offered with traditional banking.
Buyers can also tap similar options by allowing buyers to optimise their cash conversion cycle and extend their payables due date to suppliers, freeing up working capital that would otherwise be trapped in the supply chain.
Unlike commercial lending or dynamic discounting, such off-balance-sheet financing options allow SMEs to keep a low debt-to-equity ratio and preserve their borrowing capacity while diversifying their access to funding and reducing their reliance on traditional financial institutions. It also helps them mitigate the risk of their receivables and build up economic resilience in these volatile times.
Hunkering down for uncertain times
Without an end to the conflict in Ukraine, many SMEs will need to build up their resilience and prepare themselves for prolonged volatility. During this period, SMEs in Europe will be challenged to transform their supply chain to buffer against ongoing disruptions and increase their working capital to remain fiscally agile in these uncertain times. These drivers will increase interest in receivables as an asset class among the SME community. They will look for more ways to manage risk in their trade processes and improve liquidity to weather through the storm.
About the author: Morgan Terigi is CEO and Co-Founder of Incomlend.
Member countries of the International Energy Agency (IEA) will meet on Friday to decide on a collective oil release, a spokesperson for New Zealand’s energy minister told Reuters via a Thursday email: "The amount of the potential collective release has not been decided [...] That meeting will set a total volume, and per country allocations will follow.”
It remains unclear as to whether the US’ potential draw would come as part of a wider global coordinated release. If Biden does choose to draw from the SPR, it would be the largest draw in the SPR’s almost 50-year history.
US President Biden is expected to deliver an update on his administration’s actions on Thursday, the White House has said.
Following the news, global oil prices plummeted more than $5 per barrel, having surged since Russia’s unprovoked invasion of Ukraine on 24 February.
September 15, 2008
Financial banks are on the brink of collapse, the stock market is in the first inning of what would be a freefall, and the forecast for the foreseeable future is blood in the streets. So with the global economy teetering on the edge of a swan dive into the abyss, the Federal Reserve stepped in with an innovative policy response that would arguably become the most well-known financial acronym in economic history, quantitative easing, or QE for short.
Glossing over a ton of details, with express apologies paid to the professional economists out there in the audience, QE had one, singular goal - to prevent the worldwide monetary system from freezing up. To accomplish this, the Fed simply oiled up the ol’ printing press, created new money out of nothing, and then injected copious amounts of liquidity (i.e. cash) with those newly created funds by buying debt instruments in the open market.
Not too dissimilar from snaking out your shower drain when it gets clogged, this meant that any jams in the system could quickly be cleared, and the banks and institutions on the other side of these transactions would receive a strong boost of capital that allowed them to continue their operations and strengthen their balance sheets. With this safety net in place, the thinking was these same banks would continue to have the capital to lend out in the form of mortgages, auto loans, business ventures, etc. - all the while the huge demand for debt by the Fed itself would act to keep a lid on interest rates (as bond prices and interest rates move inversely) thus keeping the demand for all this new money continually stoked.
Months and quarters went by, as the stock market roared back to life, and the economy healed itself. But quantitative easing didn’t stop, as QE1 became QE2 became QE3 became QE-infinity, and before you knew it, the market began to expect more accommodative policy from the Fed at every meeting and would sell off sharply at the mere hint of anything otherwise.
Good times were rolling again, but all that extra cash must have a downside, right? It must lead to the classic “too many dollars chasing too few goods” scenario sooner or later, which would only lead to a weaker USD, and a higher cost of goods in the US (i.e. inflation), right? Right?
Well, not exactly, as the low cost of money across the board actually led to an incredible surge of growth, productivity, and innovation, all of which allowed producers to keep production costs low, which in turn kept consumer costs low. So, much to the chagrin of many prognosticators making the same prognostication that inflation would explode before the ink was even dry on the Fed’s first bond purchase in the fall of 2008, this didn’t happen - at all. In fact, 2009, 2010, 2011…’12…’13…’14…’15…’16…’17…’18…’19…and most of ‘20 saw inflationary figures hover barely above zero.
Fast forward to the present: Why is inflation a worry?
Fast forward back to the present - what has recently changed in the worldwide economy such that inflation is now something that nearly every American has to worry about?
The breakdown of the supply chain.
The economy was clearly able to absorb years and years of QE, even long after it might have “needed it”, with little more than a hiccup higher in inflation or a modest blip lower in the value of the USD. But the global disruption that was, and very much still is, a worldwide pandemic appears to have been the straw that finally broke the camel’s back.
With large-scale production centres slowed down significantly, and cargo ships stalled out at sea in an effort to quell the spread of the virus, producers were unable to quickly, easily, and efficiently access the raw materials needed to produce their goods. And as a result, they were shut off from tapping into all the competitive advantages and high-leverage efficiencies they had developed over the previous years through technological advancements and overlapping synergies because there were now links missing from the supply chain. Gaps in the production cycle presented companies with huge obstacles to navigate.
Not to mention, with the supply chain breaking itself and a lower supply of the necessary goods, basic economics reminds us that a limited supply will always lead to a higher price, ceteris paribus, and thus producer prices begin to rise, paving the way for consumer prices to also rise. Specifically, the most recent reading of the Producer Price Index (PPI) and Consumer Price Index (CPI) have shown increases of 10% and 8%yoy, respectively - a multi-decade high for both.
A difficult market for both producers and consumers, without question, but that’s how we have arrived at the spot we are in.
What’s on the near-time horizon?
Unfortunately, until there is some resolution to the Russia-Ukraine war and global trade is restored to some degree, inflationary pressures will likely persist for some time. Case in point, fertiliser, a critical component of the farming process that obviously has a direct link to food and crops, has seen a 30% cost increase in just the last few months. According to the UN Food and Agriculture Organization, in 2021, Russia was one of the world’s leading exporters of nitrogen and phosphorus fertilisers - an ominous situation given the economic sanctions that have been placed on Russia as a result of its unprovoked invasion of Ukraine. So one would think it’s only a matter of time before these added costs get passed down to the consumer at the local grocery store, and inflation accelerates even faster.
But just as the slam dunk that was higher inflation from QE missed the mark for well over a decade, we can all hope that maybe the economy has other plans, and our forecasts are dead wrong - again.
About the author: Dr Jim Schultz, Phd is a Market Expert and On-Air Personality at tastytrade, the beloved live financial network that provides financial information, investment strategies and entertainment related to trading and the stock market.
