Weekly Market Update (September 11, 2022)
Fed gave a speech about curbing inflation forthrightly and noting the labor market is still very strong. Market adjusted their expectation on the upcoming rate hike this month from 50bps to 75bps. In the meantime, the CPI data in the US is still a swing factor that should be kept an eye on. The summer rally in the market is over as there was not many economic data suggesting a recovery and investors start to realize it. In terms of seasonality, the market usually peaked in August during crash years, and volatility starts to pick up in September. Dollar index hit 110 this week, another new high for the dollar index without surprise. Dollar uptrend is expected to continue and we see no reason to expect it not to.
Energy Crisis: Europe’s major gas pipeline Nord Stream 1 has been shut down this week and will remain down indefinitely. Putin also threatened to cut all energy supplies if price caps are imposed on Russia’s energy exports. This is the seventh round of sanctions on Russia so far, while its feasibility remains skeptical(*). European countries are talking about energy restrictions and cost-saving measures such as taking cold showers and limiting room temperature.
(*)Why the G7 price cap will not work: 1) They want to control Russia’s energy revenue while they cannot control its exports. That is why they want to apply a price cap. But if they cannot control exports, it is even harder to control the price 2) High monitoring cost and lack of legal authority to control world seas to inspect tanker 3) Implementation of price cap is not easy e.g. UK struggles to impose energy price within their own border and own citizens; US failed to cap health cost for decades
ECB: The benchmark interest rate is raised by 75bps and ECB has signaled further hikes are coming. Similar to the Fed, ECB is striving its best to fight inflation, and even worse that the eurozone faces higher energy costs in the coming winter. Given the unstoppable rising energy prices and risks of further reduction in energy supply, downward pressure on economic growth is expected, particularly for those companies and economies that rely on European demand and trading.
China: The trade data in China is disappointing. China's exports in August rose 0.3% YoY while exports rose 7.1% YoY. Both of them missed expectations due to covid controls, power shortages, and weak domestic consumption. However, exports in China are expected to pick up in the coming 2 months as foreign demand will rise ahead of winter and Christmas holiday season. Besides, China's CPI and PPI data in August came out lower than expected.
APAC: The deposit rate in Singapore is the highest in more than two decades. Malaysia hikes its rate to 2.5% while mentioning policy will remains accommodative to support growth. Bank of Indonesia announced that aggressive rate hikes like Fed should not be expected.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Non-US equity valuation will be more compelling than those in the US. US assets are becoming less attractive to foreign investors as the bond purchasing of central bank is declining. Considering global diversification, unlike other major countries, China has more room and flexibility for stimulus with its low inflation, relatively strong currency, and high real rates.
Bank of America: The equity market analysts are divided into bull and bear, which is rare in history. Technical signals are supporting the bull camp while fundamentals are more favorable to the bear camp. We are with the bearish camp. A decline as big as the previous months has never happened without an ensuing recession. An easing is highly unlikely to happen as early as the bull camp hoping for, especially after Jackson Hole.
Morgan Stanley: A terminal rate of 3.25% with 65bps cuts by early 2024 is priced-in in the futures market before the Fed’s decisively hawkish statement. Now the market is implying a 3.8% terminal rate with 40bps cut next year. It will affect significantly the equities’ forward valuation multiples. J.P. Morgan: Markets are pricing in rate hikes of 75bps in September, 50bps in November, and 25bps in December, resulting in a range of 3.75-4% by the year-end. The rate cuts expectation was pushed back as markets believe the high-rate environment will last longer. Treasury yields have factored in the continued hawkishness.
UBS: Fixed income is resuming its role as a diversifier. Since 1930, after the period of stocks and bonds falling together, the 12-month bond performance has been positive every time with an average return of 11%. 2Y yield is hovering around 3.5%, providing a good guide to future returns which suggests a stronger outlook than most of the era of the post-global financial crisis.
Morgan Stanley: The situation in Europe continues to worsen. Electricity prices have surged to more than 15 times the pre-COVID level, stemming from droughts, cuts in Russian supplies, and summer heat. Inflation in the EU is running ahead of the US and increased the likelihood of a recession.
HSBC: ECB decided to raise rate by 75bps and remove the 0% cap on remunerating government deposits. European government bond yield rose, while the benchmark German 10Y Bund yield and UK Gilt yield surged by 14bps and 11bps respectively.
UBS: Private equity market is expected to grow in the coming quarters. Private equity managers are taking advantage of the recent market correction in public markets to take companies private. For private credit, direct lenders have been replacing banking to provide liquidity to the market.
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