HIGHLIGHTS
Stock tumbled sharply after the Fed's hawkish speech at Jackson Hole. Dow, S&P500, and Nasdaq dropped more than 4% this week. The inappropriate optimism of the market has been stamped out after this anti-pivot speech. Funds are stacking up their cash holdings rapidly and reducing their equity exposure. Earnings are expected to go down further in the remaining of the year, driven by aggressive hikes.
Fed: More large hikes are coming in order to fight the highest inflation in 40 years. Jerome Powell mentioned that the rate is likely to stay high for some time, and a longer period of weak growth is required to reduce inflation. His speech also implied the determination of beating inflation, even at the cost of households and businesses.
China Stimulus: A massive 1 trillion yuan stimulus rollout to support the economy in China. The package aims to support the companies impacted by the pandemic, especially the micro, small, and medium-sized companies (MSMEs) that account for more than half of the GDP but are vulnerable to disruption. Market sentiment is boosted and reacted positively.
Sinking Euro: Euro went below the parity level against the dollar. The uncertainty of energy supply and a potential recession in the eurozone is dragging down the currency. Economists are expecting an earlier and worse recession in the eurozone than in the US. ECB has so far raised the interest rate by 50bps while FED has raised it by 225bps since March. The money would normally go to the place with a higher yield.
Oil: OPEC+ is possible to cut its supply to correct the prices amid the thin liquidity and high volatility backdrop. Some investors are surprised about the pivot act of OPEC+ as they have been under pressure from the US. It is possibly a move to warn the US about the consequences of making the deal with Iran. Supply issues aside, oil prices dropped slightly after Fed’s strong stance on fighting inflation, implying slower growth and weaker job market, which is detrimental to the demand side.
MARKETS
12,141.71 | -4.44% | |
S&P 500 | 4,057.66 | -4.04% |
Dow | 32,283.40 | -4.22% |
10-Year | 3.04% | +6bps |
Brent | 100.99 | +4.41% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Morgan Stanley: S&P500 have retraced 50% from the bottom and 90% of stocks are above their 50-day moving averages. The magnitude and duration of this rally conform with the other bear market rallies. The average bear market retracement is 18% while the current one is 15.3%. The 200-day duration of the bear market is also below the average of policy-driven declines.
Goldman Sachs: Historically, the US equity market has been following a 50% retracement in bear market. It already happened in early August. S&P500 is expected to have larger gains than losses in a year following such retracement, with a 5% loss during downside periods. The skewed return profile and the momentum of previous rebounds are suggesting that the equities are likely to sustain the rally.
Bank of America: The high energy prices accounted for most of the earnings growth over the first half of the year. We can see the strong rally in the equity market since the peak of oil prices in June implying that the market may think the worst effect on energy from the Russia-Ukraine conflict is likely over. The easing sanctions on Russian commodities exports are alleviating the shortage situation and inflation, which has fueled the major equity relief rally.
Citi: The darkening growth outlook caused by the Fed’s tightening is priced in by the market. We do not believe riskier equities will rally if Fed is delivering the tightening as promised.
Fixed Income
Morgan Stanley: It is surprising to see the resilience of the corporate bond market for both investment grade (IG) and high yield (HY) credit spreads. Rate hikes usually cause a higher default rate and drag down bond prices. However, IG bonds are favored from the strong company balance sheets and weak issuance. The current number of IG issuance is running behind compared to the previous 2 years.
Goldman Sachs: Municipal bonds (MUNIS) demonstrate their strong fundamentals despite the setbacks this year from rate hikes and overwhelming outflows. Consequently, higher yields and a better potential for capital appreciation suggest spectacular forward returns for MUNIS.
Citi: With another 100bps hikes expected by the end of this year, the 2Y treasury yield is the highest across the curve. The 2Y treasury yield is at 3.2%, which is almost as high as the 30Y Italian or Greek debt. The short duration IG corporate yield in US is even higher than the yield of those volatile sovereigns.
Economy
J.P. Morgan: Housing is accounting a third of headline CPI. Due to the high mortgage rate, housing costs were up 0.5% during the month. The average 30-year fixed-rate mortgage rate rose to 5.4% this week, while it was still 3% last year. Building permits, which is an indicator of housing starts, fell 1.3%. It indicates further weakness ahead.
HSBC: The US GDP is revised upward due to the adjustment in personal consumption. Economists are expecting positive and mild growth during the rest of the year. Inflation is also expected to slow down on a monthly basis.
China
Standard Chartered: Chinese equities have underperformed global equities due to the weak earnings in 2Q22. One-third of companies in MSCI China A onshore index missed expectations. Liquidity pressure on developers also give pressure on the Chinese property sector. We expect policies to remain supportive, especially for the real estate market. Cuts in loan prime rate (LPR), further relaxation of purchase restrictions (i.e. down payment requirement of 2nd hand houses), and more funding for development projects are all positive signals to the market.
KNOWLEDGE TRANSFER
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DISCLOSURE
This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.
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