With inflation now at a 40-year high and a raging war in Ukraine, consumers are feeling the heat from rising food and energy prices. Meanwhile, fears of recession have many investors fleeing to “safer” assets. The question on everyone’s mind right now is: What happens next?
Finance Magnates caught up with Head of Training and Market Strategy at Orbex, Mohamed Al-Mariri who shared with us his two cents on what’s been happening in the markets and what we can expect after a tumultuous first half of 2022.
To say that H1 was challenging is putting it mildly, what is your take on the current state of the economy? Will Central Banks be able to rein in inflation?
The first half of 2022 was sobering for the global markets; after a massive bull run for tech stocks, markets corrected sharply lower. In fact, Big Tech is now 75% down from its 2021 highs, and while the bear market has weighed on most major sectors, we saw energy companies skyrocket in 2022 on the back of rising oil and gas prices.
At Orbex, we had anticipated these corrections as the 2019-2021 bull run was largely inflated by low interest rates, stimulus cheques, a rising retail interest in the financial sector, and of course the pandemic-induced lockdowns.
As Covid restrictions were lifted and global trade resumed, the world began to realize the consequences of the pandemic. The first issues the markets faced were shortages in raw materials and supply-chain disruptions, which in turn caused prices of manufactured goods to skyrocket.
Then, in early 2022 Russia's invasion of Ukraine marked the largest armed conflict in Europe since World War II, displacing millions and putting a huge strain on Europe’s economy. The Western world retaliated with severe sanctions against Russia and an embargo on crude oil imports that caused oil prices to surge to 8-year highs.
Meanwhile, as Ukraine and Russia are both significant producers and exporters of several commodities including wheat, corn, sunflower oil, and fertilizer, the prices for basic goods also increased. All this to say that the cost-of-living inflation consumers are experiencing today was exacerbated by several different factors and so long as the Russia-Ukraine conflict drags on, reining in inflation will remain very challenging.
Recently we saw the dollar reaching parity with the euro as a result of the aggressive rate hikes by the Federal Reserve. Why did this happen and what can we expect from the forex market in H2?
With CPI inflation being at 9.1%, its highest in decades, the Federal Reserve was forced to increase interest rates by 75 basis points back in June, marking its largest hike since 1994. This, and the fact that the dollar, as the world’s reserve currency, is considered a safe-haven in times of uncertainty, resulted in the greenback pushing higher.
That being said, the Fed’s target remains to push inflation back to 2% and to do that they will keep raising interest rates in H2. The consensus is that the Federal Reserve will raise rates to as much as 4-5% by 2023. This means that the USD could keep its stronghold in the FX markets well into next year.
Now as far as the euro is concerned, a currency’s exchange rate can be a verdict on the economic prospects of its corresponding nation/s, and Europe’s have been fading. The Eurozone economy is facing tough challenges at the moment, growth is forecast to stagnate in H2, Germany and Italy are at risk of a recession due to their dependence on Russian energy, and inflation is forecast to come in at 7-8% by the end of 2022.
Meanwhile, the recent heatwaves, wildfires, and a surge in Covid cases are tightening the chokehold on Europe. Two key dynamics to look out for in terms of EUR strength are energy prices and food prices.
Lately, we hear a lot of talk about recession and stagflation. What is the difference and are these fears blown out of proportion?
Initially, let’s clarify that recession is a normal part of an economic cycle. Typically, a recession cycle will last about six to 12 months, so we could argue we are already at the beginning of a recession cycle, especially after the S&P hit multiple record highs in 2021. So, investors needn’t worry as much about experiencing a recession; in fact, recessions can be fraught with both long- and short-term trading opportunities.
Stagflation on the other hand is a much more serious threat to an economy as it often leads to serious and prolonged downturns, in other words, depressions. Stagflation is characterized by high inflation (rising prices) and high unemployment. For now, the employment market appears to be quite healthy despite the high inflation figures. In the US, employers are even citing a labor shortage.
That is not to say, however, that we are completely in the clear. High inflation, if left unchecked, can have very damaging effects on the global economy. Stagflation could also easily become a self-fulfilling prophecy; companies may opt to proactively cut costs and stop their recruitment efforts in order to offset rising production costs and perhaps even prepare for a drop in demand.
What is your outlook on Cryptocurrencies in H2 2022? Could we see a recovery before the end of the year?
2022 saw major cryptocurrencies including Bitcoin and Ethereum correct sharply lower, and while we expected a correction, recent high-profile debacles at highly leveraged crypto players such as Celsius, and Terraform Labs triggered a meltdown in the crypto markets. Some analysts maintain that we’ve already witnessed the bottom of the crypto crash and that in H2 major cryptocurrencies will begin to recover; but I would argue that traders should keep an eye on rising inflation which could reduce demand for cryptocurrencies.
In terms of regulation, I think that news on regulation should be bullish for cryptocurrencies in the long term. Regulation is necessary in order for cryptocurrencies to reach mainstream adoption and use. Institutional investment in crypto is also on the rise, which could signal a reversal in H2. As far as individual coin trends, I would monitor the price of bitcoin as its price action largely affects that of other altcoins.
Another major cryptocurrency to keep an eye on in H2 is of course Ethereum, as the Ethereum 2.0 launch has recently been set for September 19th (not final). This means that there’s a very high chance that ETH will very soon migrate to a proof-of-stake (PoS) network, and if the move is successful, it could push ETH’s price significantly higher.
If you could give investors one piece of advice when it comes to navigating the markets in H2, what would it be?
It’s what I would advise anyone looking to start trading or investing at any point: do your research, know the risks. If there’s one thing that I’ve learned about the markets is that they “like” certainty. If you are following certain news, such as rate hikes, if the result matches the analysts' forecasts, it is more likely to be well-received by the markets. So as a trader or investor you always need to think in terms of what the market is expecting vs what the actual outcome is.
Always thinking two steps ahead when trading the markets at such a volatile time is of course no easy task. It’s why at a time of such uncertainty, traders need actionable insights into the markets to understand what types of scenarios they should be preparing for.
Our expert Research and Analysis team at Orbex is committed to helping traders and investors of all levels gain a better understanding of what drives the markets by providing them with timely analyses, live trading webinars, and quarterly outlooks. At Orbex, we employ a team of leading analysts, strategists, and researchers eager to share their knowledge with our clients and answer any market-related questions.
All these resources and tools are made available for free to anyone interested in learning more about online trading.
About Mohammed Al-Mariri
Head of Training and Market Strategy at Orbex, a leading forex and CFD broker. Mohamed Al-Mariri is a Chartered Market Technician (CMT) and a member of the American Market Technicians Association (MTA). He has over 15 years of professional trading experience and has developed an advanced approach to fundamental analysis with a focus on risk management strategies. He chairs several investment conferences and leads the Orbex Research and Analysis team. Al-Mariri hosts live webinars, seminars and events and is often invited to appear live on major media outlets including CNBC and Al-Arabiya to share his expert insights on the markets.
About Orbex
Orbex is a leading global investment services firm offering award-winning forex and CFD trading services at some of the most competitive conditions. Since its inception in 2010, Orbex has committed to providing access to first-in-class trading and investing solutions that are backed by leading education, expert research tools and the ongoing support needed to assist clients in navigating the global financial markets.
