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Weekly Market Update (August 7, 2022)



HIGHLIGHTS

US equities were flat compared to the previous weeks. S&P 500 rose 0.4% while Nasdaq gained 2% last week. Earnings continued to roll in. The spectacular job reports are giving more confidence to the Fed’s hawkish policy, and more wagers are on the aggressive side. 2Y Treasury yield jumped 20bps on Friday.


Real Estate Downturn: In Canada, their benchmark for housing prices has dropped for 4 consecutive months, indicating a possible downturn in the housing market. UK housing prices also recorded the first decline in a year while the US mortgage rate dropped below 5%. The pandemic real estate boom is coming to an end due to the skyrocketing benchmark rate of the Fed.


Surprising NFP: The employment data exceeded expectations for more than double. Non-farm payroll jumped by 528k while economists’ estimation was 250k. Market has shifted view from expecting a 50bps rate hike to 75 bps.


Another Job Report: US initial jobless claims were reported at 260k, above last week’s 254k in line with expectation. Fed governor, James Bullord, has said he doesn't see the economy falling into a recession despite aggressive Federal Reserve policy. However, comments from the fed governors suggested the probability of another 75bps point hike in September, while only a 50bps hike was expected in the market before the NFP announcement.


Earnings: Earning season continues to roll on. Around 80% of S&P 500 companies reported Q2 earnings reports already with nearly 75% of the companies reporting an upside surprise to earnings growth for the quarter. It is suggested to be the reason supporting the recent equity rally over the past few weeks. However, some mentioned that Q2 earnings reports had not yet captured the full extent of the rate hike and the Fed’s tightening program.


Oil: Oil price was down 10% this week. WTI crude oil moved below $90 for the first time since the Ukraine crisis began. Supply is boosted due to the increase in output from OPEC+ (despite a small increment), an unexpected build-up in U.S. gas inventories, and supplies from Libya are back. The shrink in factory activities in China (the biggest importer) is also clouding the energy demand. All headlines are negative about oil prices.

 
MARKETS

Nasdaq

12,657.55

+2.15%

S&P 500

4,145.19

+0.36%

Dow

32,803.47

-0.13%

10-Year

2.84%

+20bps

Brent

94.92

-13.72%

*Data as of market close. 5-day change ending on Friday.

 
VIEW FROM THE STREET

Equity

Goldman Sachs: Earnings reports remain resilient in Q2 despite the strong dollar weighing on revenues. More than half of the companies that have already reported have beaten consensus by more than one standard deviation.


UBS: Investors choose to wait on the sidelines while facing an uncertain outlook. Historical data showed that it is wrong - a wait-to-buy strategy would have underperformed the buy-and-hold strategy 80 times. Besides, investing after a 20% drop would give an average 1-year return of 15% while the return of holding cash over the same period is 2%.


Bank of America: A pickup in the volatility of equities is plausible as analysts are likely to revise earnings forecasts lower over the coming quarters, despite the drawdown of equities being mainly driven by the compression in the P/E ratio.


Morgan Stanley: The Equity Risk Premium (ERP) is below 300bps, translated from 10Y Treasury yield. The average ERP in the past 13 years is 350bps. Historically, the preferred entry point is when ERP is above 450bps during the period of aggressive rate hikes and the coming recessions.


Economy

J.P. Morgan: There is a more comprehensive definition of recession, other than merely two consecutive quarters of negative GDP growth. According to NBER, employment figures, household income, trade, and industrial production should be considered when defining a recession.


Bank of America: Money growth is likely to fall significantly if quantitative tightening continues as planned. Dollar keeps strengthening and financial conditions keep tightening. It is expected that given the dollar shortage in the coming year, the heavily dollar-indebted countries would put more strains on the global financial system until something breaks.


Commodity

Morgan Stanley: Most commodities have dropped at least 20% from the peak. Global supply chains for goods are recovering and relieving some pressures on inflation, especially for metals and semiconductors.


Fixed Income

Morgan Stanley: The 2Y/10Y Treasury curve steepened though the Fed did not pivot or was not dovish. Fed fund rate is at 2.25% now, approaching the peak of the last cycle. The market interprets that it is getting close to the end of the Fed’s mission. 10Y real rate (the stock valuation driver) fell 60bps in 2 weeks.

 
KNOWLEDGE TRANSFER

Elon Musk's Twitter

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London Metal Exchange

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LUNA

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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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