Credit Musings: July 27, 2022

Jul 27, 2022

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Public Trust Credit Team

Potential emerging threats to the economy are no longer unexpected, but they are speculative and nearly innumerable. To wit: Speaker Pelosi’s potential trip to Taiwan has the Biden Administration on high alert.

In the early days of Russia’s special military action in Ukraine, questions were raised about the possibility of China taking actions against Taiwan. Senator Chris Coons of Delaware was quoted in the New York Times yesterday morning saying “there is a lot of attention being paid (to the lessons learned from Russian action in Ukraine), and one school of thought is that the lesson is ‘go early and go strong’ before there is time to strengthen Taiwan’s defenses. And we may be heading to an earlier confrontation — more a squeeze than an invasion — than we thought.” The quote was offered in an article about the Biden Administration’s efforts to convince Speaker Pelosi not to proceed with a scheduled visit to Taiwan; mainland China has been clear that such a visit could trigger retaliation. The Chinese government has given indications that it may not invade, rather it could disrupt all maritime-based trade. Taiwan’s foundries accounted for 60% of global semiconductor revenue in 2020, and any disruption to that supply chain could be catastrophic for many tech-enabled industries. Although this is still speculative, it could quickly become meaningful news in the age of exogenous shocks to the domestic economy.  

European Central Bank exits negative interest rate environment after 8 years.

The European Central Bank (ECB) lowered interest rates to negative levels in 2014 where they remained until last week when a larger-than-anticipated half-point increase took rates to 0.0%. In an effort to spur economic growth, the ECB lowered interest rates to negative levels eight years ago to “…make savings so unattractive that banks hand out more loans, and that households no longer save but start investing or just consuming…” (Carsten Brzeski, ING Research). As a result, the value of the euro declined and its goods became more inexpensive and attractive to foreign investors, which in turn, encouraged growth in the European economy. An additional side effect of the negative interest rate environment was the debilitating impact it had on the net-interest income of European banks. The ECB’s recent interest rate increase is the first in 11 years and reflects its efforts to balance promoting economic growth with escalating inflationary pressures. While it remains uncertain how much impact the flight from negative rates will have on the region’s economic activity, European banks are expected to benefit from increasing margins over the short-to-medium term.  

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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