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22 August, 2022 - All eyes on Jackson Hole, Wyoming, USA.



Equity markets lost ground for the first week after four weeks of gains, with Nasdaq performing the worst, with a 2.5% drop, and Swiss stocks out-performing with small weekly gains. On a tehnical level, the S&P500 failed its first test to overcome its 200-day moving average, as the overbought conditions prevented traders from continuing to bid the market higher.


The main catalyst for the move lower was the rise in bond yields, as the market re-assessed its view with respect to the what comes next from the FED. The "peak hawkishness" theme started to erode as various FED voting members spoke very openly in favor of continuing to be aggressive against inflation and hence maintaining high interest rates for a long period of time.


According to the minutes of the last meeting, the FED expects to raise interest rates to levels which they consider "restrictive" (i.e at levels where economic activity is hurt) and remain at those high levels for "quite some time". Now, this attempted reference to a time-frame is as vague as it can get. And what this restrictive level of interest rates is, is still debatable. Most economists agree that 2.5%-3.0% is the region which is considered "neutral". This means that for rates to be restrictive (as the FED wants) they will have to move closer to 3.5-4.0%. What the market found as new information from the minutes is the first mention by FED officials of a potential risk associated with tightening monetary policy too much, too fast. The markets were quick to interpret this as a first sign of a potential change in guidance on monetary policy as soon as this fall.


The upcoming Jackson Hole symposium, at the end of the week, hides potential (market) excitement in any direction. This annual symposium, held at the end of August, has usually been the forum for major announcements by FED Chairmen. The bulls are hoping that the FED will make the "pivot", ie to guide the markets to a new direction and potentially hint to a less aggressive Q3/Q4 monetary policy. But, we find this scenario highly unlikely, based on recent communication by the majority of the FED officials. On the contrary, J. Powell might use this forum to push back the markets' expectation for a "dovish pivot", by repeating the FED's strong intention to bring inflation down almost at any cost. If the recent comments by voting members is any guide, the Jackson Hole symposium might disappoint the bulls and create the conditions for a new leg lower.


China continues to move in a different monetary path. Its central bank reduced the main rate at which it provides short-term liquidity to banks, from 2.1% to 2.0%. The central bank also cut the rate of its one-year lending facility from 2.85% to 2.75% in order to "maintain reasonable and sufficient liquidity in the banking system," it said in a statement. It was the first time since January that those rates had been cut. Now, there is increased speculation that it will cut its benchmark rates as soon as this week.


US July Retail Sales gave a mixed signal. The headline number showed zero growth, missing the expectations for +0.10%, but if one looks into the details things were actually better. The ex -gas&autos subindex was up 0.7% vs expectations for 0.6%. Then again, July included the Amazon Prime day, with millions of consumers taking advantage of steep discounts. Hence, one cannot draw a lot of conclusions about July's retail activity, other than, at least they were not a disaster.


The US housing market continues to move significantly lower. Sales of previously owned homes fell nearly 6% in July compared with June, according to a monthly report from the National Association of Realtors. The sales count declined to a seasonally adjusted annualized rate of 4.81 million units, which is the slowest sales pace since November 2015, with the exception of a brief plunge at the beginning of the Covid pandemic. Sales fell about 20% compared to July of last year.


Government bond yields continued to move higher. The bond market (and the foreign exchange one) have chosen to listen more carefully to what the various FED voting members have been saying the last days, that the fight on inflation is far from over. The US 10-year yield approached 3.0% and the German equivalent is close to 1.20% again.


The USD strengthened and Gold dropped, as yields rose. The EURUSD traded close to parity again, after having recently reached 1.0350, while Gold finished the week closer to 1750$ failing to overcome the 1800$ level. For EUR-based investors, however, the price of Gold was almost unchanged, given that the rally in the USD partly compensated for the fall in price of the metal.


European Q2 corporate results have underwhelmed, as we approach the end of the reporting season. With almost 80% of STOXX 600 companies having reported, only 52% of companies beat Q2 profit estimates. In Q1, 61% of companies beat estimates, while the long-term average is 57%. And this performance is calculated against already slightly reduced expectations than at the start of the year.

 

Chart of the Week : Looking back at history (2000-2003)



This is the chart of the S&P500 in the period of 2000-2003. That is when the 2000 bubble burst and global equities fell precipitously for almost 3 years. The S&P500 found its bottom after an almost 60% drop, in March of 2003, which a typical month for market bottoms after severe bear markets. But first a mini-disclaimer: we are not forecasting either a bear market that would last again 3 years or that equities will have to fall more than 50% from their highs to find a bottom. What we want to highlight is the fact that during a lasting bear market which created a lot of pain, we witnessed significant rallies that lasted for a few months and the index rose by 20%+ each time. These periods of rallies are highlighted with the red dotted circles. However, and that is the definition of a lasting bear market, the index was falling to a new low after each rally. It was the final, fourth time that the index rallied and then fell again to test the previous bottom (double bottom formation) which marked eventually the end of the bear market. From a fundamentals aspect and with a difficult winter ahead of us, it is very difficult to see how markets can move much higher than current levels, before testing successfully the previous lows or somewhat close to that.


Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Factset

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