Weekly Market Update (July 24, 2022)
Stocks finished sharply higher following positive earnings results and news that natural gas flow is resuming through the European Nord Stream pipeline from Russia to the rest of Europe. It is noteworthy that there is macro risk to earnings after the disappointing results from several sectors as well as weak Europe and US PMI data.
UK CPI: UK inflation rose above expectation to 9.4%, hitting a new 40-year high. Inflation is expected to top 11% a quarter later if the energy prices jump further. The BoE has implemented five consecutive rate hikes at a 25bps rate, putting pressure on BoE to deliver an aggressive rate hike next month.
ECB: European inflation is at a new high of 8.6%, and not have peaked yet. The ECB announced a 50bps rate hike while the market was pricing in a 50% chance of a 50bps hike. The 8-year negative rate era ends. July is a challenging time for ECB as the energy import remains depressed and uncertain.
Gas: Nord Stream pipeline resumed last week at a discounted volume after maintenance. It is a relief for investors about Russia's energy exports would be used as a political weapon as this is the main pipeline for delivering more than one-third of gas from Russia to Europe. However, the political risk still remains and the EU is discussing ways to handle the potential crisis, including reducing gas usage by 15% from the average over the same months of the last 5 years.
China Bank Scam: Four banks in the central provinces have denied their customers access to RMB10 billion of deposits. China authorities are going to repay the victims, beginning with the amount of the deposit below RMB50,000. The arrangements for the higher amount will be announced later.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Market was confirming a further bearish market after the start of the third quarter, especially for those linked to energy which a peak in inflation was likely confirmed by increasing retail inventories and dropping order books. The interest rate was expected to be eased by next year, resulting in a rebound in stock prices. Everything changed after the announcement of the headline CPI in June.
UBS: Investors are suggested to invest in value stocks, which tend to outperform growth stocks when inflation is above 3%. UK market is also favorable due to the high weighting toward value sectors.
J.P. Morgan: Although the June CPI report was exceeding the expectation surprisingly, we see a promising signal of inflation coming off its peak in July. Energy prices dropped significantly, leading to a deceleration of price pressures in the coming weeks. It should give some relief to the Fed, but whether Fed will act on this lagged news remains questionable.
UBS: Markets moved to price in a more aggressive hiking cycle in response to the previous CPI data. An additional 33bps tightening is pricing in by December fed funds futures. The pricing also implies that the Fed will stop tightening as soon as February.
Morgan Stanley: US Treasury yield jumped by about 50bps after the inflation report, implying a 70% likelihood of a 100bps rate hike later this month. The inverted 2Y/10Y US Treasury yield curve inverted further to the lowest level since 2000. Volatility of the bond market remains high according to the MOVE index.
HSBC: Investment Grade bonds are preferable within the Eurozone. High-quality and short-dated bonds are recommended. Spreads of European High Yield were underperformed on the back of the growth concerns.
Deutsche Bank: Many countries are increasing their efforts in renewables and reducing their dependence on energy. The Russia issue has accelerated the policymakers to move away from traditional energy. However, we see the rising prices of energy are attributable more to the supply than the demand side.
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