highlights
- US equities finished lower for a 3rd straight week, with the Russell 2K declining 4.74%, followed by the Nasdaq (4.21%), and S&P 500 (3.29%).
- With the risk-off tone underpinning markets, the S&P 500 has now declined 8.8% since topping. 4,300 on August 16th amid fears a more aggressive Federal Reserve may send the US economy into a recession.
- The Dollar index was stronger, setting a new fresh 20-year high and logged its 4th gain in the last 5-weeks. It continues to trade near its strongest level in 20 years versus the Euro, while the Yen has pulled back 46% against the USD, its largest ever peak to trough decline against the Dollar.
- All sectors finished lower on the week. Materials was the largest underperformer which came after commodities were pounded on Tuesday as investors weighed a hawkish Fed, a deepening energy crisis in Europe and the possibility for a prolonged economic slowdown in China.
- Despite the 4% weekly decline in the Bloomberg commodity index, the benchmark is still up more than 20% for the year.
- Non-farm payroll data, showed an addition of 315,000 jobs, which came in 15,000 above expectations. Mining activities and scenic/sightseeing transportation jobs were among the fastest growing jobs added in August.
- Markets continue to price in 75bps raise to the Federal Funds rate in September, but have pushed out their expectations for a cut in the Fed funds rate until the end of 2023.
- September has seasonally been a weak month with major benchmarks posting a negative average return in September over the past 30 years.
- On Friday, G7 countries agreed to set a price cap on Russian oil to limit Vladimir Putin’s ability to fund its war.
- Russia reacted to G7 agreement by shutting down its Nord Stream 1 pipeline indefinitely and shifting payments to 50% in rubles and 50% in yuan.
US Weekly: US equities rallied this week to snap a 3-week losing streak as all sectors closed in the green. Consumer Discretionary, Materials, Financials and Healthcare and Real Estate all gained more than 4% on the week, while the laggards Consumer Staples and Energy were the only 2 sectors that failed to gain more than 2%, but still posted solid returns.
The Russell 2K and Nasdaq led gains as growth outperformed value, breaking a 4-week streak of underperformance. Some of the best performing groups included FANMAGs, Semiconductors, cloud software, retail, homebuilders, travel and leisure, banks, machinery, & hospitals.
Treasuries sold-off as yields pushed higher to close at 3.31%, up from 3.18% a week earlier. The Dollar Index, which had surged to multi-decade highs, finished slightly lower to break 3 straight weeks of gains, and closed just off the highest levels since 2002.
The gains in the market were driven primarily by oversold conditions in the short term, and additional traction in the peak-inflation narrative. Also adding a tailwind for the week was a lower bar for Q3 earnings season, as estimates in the first 2 months of the quarter came down by the most since the pandemic.
As we have seen in recent weeks, there was some skepticism around the gains, with some calling it nothing more than another bear-market bounce as Federal Reserve members remained hawkish. China’s covid lockdowns were also an overhang with more economists cutting GDP estimates, blaming the virus’s impact and the continued property market slump, which has continued to weigh on the Chinese economy.
Positioning
The rally came storming back despite some mixed signals around positioning and sentiment which included:
- Goldman Sachs noting that hedge funds had raised exposure for a 2nd straight week, pushing notional trading amounts to their highest level in more than a year.
- CFTC S&P 500 net non-commercial futures positions, an indicator of directional short positions on the index, have reached levels last seen during previous downturns in 2008, 2011, 2015 and 2020, which could result in a short squeeze.
- JPM saying hedge funds remain defensively positioned.
- MS noted they expect CTA’s to cut equity exposure by $30B as momentum has tailed off, while UBS echoed this saying, they also expect more selling pressure from CTAs in the coming weeks with the most recent bout of selling pressure in equities.
- The latest AAII survey showed bulls falling to 18.1%, the lowest since late April, while BofA’s bull/Bear indicator also fell back to 0 after rising for the 1st time since April.
- Despite the risk-on tone underpinning markets this week, investors used the opportunity to pull $11B from US equities, the most in almost 3 months.
THE FED
As discussed in recent weeks, expectations for the Fed to deliver an outsized rate hike at next weeks meeting continues to tick higher.
Market expectations continue to call for a 75bp hike at the September meeting next week, with odds now crossing above 90%, up
from 73% a week prior.
All but solidifying this, is the Fed’s motive to continue to reduce inflation, even if it increases unemployment and slows the US
economy. Perhaps one of the more forceful statements illustrating this this week came from Fed Governor Waller who said the fears
that the US economy slipped into a recession this year have faded away, which will support significant rate increases. As markets
continue to price in the higher probability of an outsized hike, sell-side economists have also adjusted their expectations, with
Goldman, Bank of America and Barclays all raising their baseline cases this week and now call for a 75bp hike.
Investor worry continues to be that the Fed will tighten financial conditions too much, slowing economic activity, which ultimately
could send the US economy into a recession. Adding to this worry was Citi, who said this week that their global supply chain pressure
index fell for a 3rd straight month in August and now stands at the lowest levels since late 2020. With supply chains slowly returning
back to normal, this should eliminate the overhang from the supply side.
INTERNATIONAL
The Bloomberg World index advanced 2.65% last week, with growth up 3.02% and value up 2.30%. Brent crude oil futures ticked
down 0.19% in a very volatile week as more countries announced measures to combat high energy prices. The Bloomberg
Commodity index declined 0.48%% during the same period, despite the rebound from grains, up 2.8% and industrial metals, up
4.08%. Hawkish policy statements from the Fed and the European Central Bank (ECB) were not enough to stop bond yields from
rising. The dollar index settled at 109 at the end of the week, down from a mid-week high of 110.20.
EUROPE
Last week, the European Central Bank raised the deposit rate to 0.75% from 0%, in line with expectations. President Christine Lagarde
left the door open for future hikes of the same magnitude if inflation persists. The ECB also updated its economic outlook and now
sees slower growth and faster inflation than it did in June. The Euro slid against the dollar following the policy announcement as
Jerome Powell delivered remarks on inflation that decreased the probability of a policy pivot. High-yield spreads in Europe continue
to widen as fixed income investors turn cautious on the inflation outlook. In August, consumer prices in the Euro-area grew 9.1%
year-over-year, up from 8.9% a month earlier. The Euro STOXX index gained 0.94% last week, led by banks, up 4.52%.
In the United Kingdom, Prime Minister Liz Truss announced new measures to tackle the energy crisis.
In fact, the government plans to cap household energy bills to £2,500 from October and provide additional liquidity to energy
companies by setting up a £40 billion fund. The Truss administration projects that this plan will reduce inflation by 4 to 5 percentage
points and stimulate the economy. Truss also lifted a ban on gas fracking to increase domestic energy supply. European gas prices
dipped after many European countries announced their energy plan to shield consumers from rising prices. The FTSE 100 index gained
0.96% last week and the British pound rebounded against the dollar.
APAC
In China, data released by China Real Estate Information Corp show that new home sales are still declining in tier one cities such as
Beijing, Shanghai, Guangzhou and Shenzhen. Property developer Evergrande announced it has resumed construction of 668 out of
706 frozen projects. This announcement came as the regulator is considering seizing undeveloped land from distressed property
developers to help fund the completion of construction projects. More and more cities are announcing measures to support the real
estate market. For instance, the city of Taizhou in eastern Jiangsu province announced revisions to down payment requirements to
attract more buyers. The Shanghai Composite index gained 2.37% last week, led by real estate, up 7.27%.
In Japan, Bank of Japan Governor Haruhiko Kuroda met with Prime Minister Fumio Kishida amid the rapid weakening of the yen.
Last week, the yen closed at 142.47 yen per dollar, crossing the 140 level for the first time since 1990. The 10-year rose by 1 basis
point to 0.25% during the same period. Prime Minister Fumio Kishida announced a new stimulus package taking effect in October,
including $347 handouts to low-income households and grants to regional governments. In July, energy and fresh food costs greatly
contributed to the 2.6% increase in inflation. In fact, electricity prices climbed 20% year-over-year and some fresh food items rose as
much as 70% in July. The NIKKEI 225 index dropped 0.87% last week.
EMERGING MARKETS
In Chile, citizens rejected the new constitution proposed by leftist leader Gabriel Boric. According to Bloomberg, 62% voted against
the proposed charter while only 38% voted to adopt it. The high participation rate of 85% weakens even more Boric’s presidency.
Following the referendum defeat, President Gabriel Boric reshuffled his government starting with his interior minister, his energy
minister as well as several cabinet members. The reaction from markets was subdued, with stocks falling 0.73% and the Chilean peso
depreciating further versus the dollar. Another catalyst for markets was the 100bp rate hike announced by Chile’s Central Bank as
annual inflation rose to a 28-year high of 14.10%.
In Mexico, consumer prices rose 8.7% year-over-year in August, the fastest increase since 2000. Core inflation grew 8.05% during
the same period, slightly lower than the consensus forecast of 8.06%. Mexico President, Lopez Obrador, said his government’s $28
billion energy stimulus program has helped keep inflation in single digit territory. He also called out specific companies that engage
according to him in price-gouging and are “abusing with exceptional profits in times of crisis.” In August, Banxico delivered a second straight 75bps rate hike, in line with the Federal Reserve rate adjustment. Economists project that the key rate will be at 9.75% by yearend,
implying 125bps additional hikes from current levels. Mexican stocks rose 2.52% last week.
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