The Day at a Glance | Jul 4 2022

The Top

*Independence Day in the United States.

*Ukrainian troops confirmed Russia captured Lysychansk. Russia close to taking control of Kyiv.

*The ECB is exploring ways to prevent banks from earning windfall profits from the subsidized lending program it launched during the pandemic.

*German exports receded and imports increased. Trade balance worse than expected (-1.0 vs 2.7e.). 

*Annual inflation in Switzerland set at 3.4% (vs 3.2%e.) and 0.5% monthly (vs 0.3%e.).

*Economic analysts expect a recession in the US with a higher chance of probability at the end of next year.

*Economist Silvina Batakis will be Argentina`s new Economy Minister.

*Chinese developer Shimao Group defaults on $1 billion dollar bond.

Economic environment

European Central Bank tool to avert debt crisis 2.0. Before increasing the interest rate, the ECB is planning how to avoid panic purchases in the sovereign bonds market. On Friday, the ECB activated a new tool to avoid “fragmentation” (unjustified increases in state member`s bond yields), which will allow the ECB to respond to record high inflation. The strategy consists of two phases: 1) Reinvesting bonds obtained during the pandemic; and 2) the anti-fragmentation tool. The first will seek to convince investors that the ECB wants an ordered monetary normalization process by reinvesting profits made in its portfolio worth $1.7 trillion euros  into  vulnerable countries like Italy. The second offers a more permanent solution, allowing the ECB to increase rates without disrupting yields in vulnerable countries. This will occur through the purchase of sovereign bonds when their yields increase in an unjustified manner – in accordance with the economy`s fundamentals.