August proved to be a brutal month for investment portfolios. All major asset classes moved lower, same as it happened in June. Global equities lost 4% and global bonds were down on average 3-4%. Even gold and oil prices did not escape the sell-off, also with a fall of about 5%. In terms of regions, Japan managed to escape with a flat August (in JPY) but slightly down when measured in other currencies. The worst performer was Europe with drops of about 5%, for most of its major indices. On a sectorial basis, Energy was positive, against the broad negative market environment, while Technology and Healthcare were the worst performers with almost 6% drops. The last two sectors should be able to protect investors when (and if) a recession hits the global economies, and the current weakness should provide buying opportunities.
September has not started well either. The S&P500 lost its 50-day moving average and returned back to the 3900 levels, where it was in the end of July. We are still about 10% higher from the lows, however. Given the steep sell-off of August and the first days of September, the month could turn out eventually to be better than feared. Market conditions are again extremely oversold, which usually lays the ground for a rebound. But as this year has proved the upside is rather limited, until we start seeing the real effect of the FEDs actions on the economy and the companies revenues. On the other hand, there are opportunities already arising for the long-term investor, who can weather the 3-6 month volatility ahead. As mentioned many times before, we are only buyers on weakness and do not chase the rallies.
The ECB is meeting on Thursday to decide on another increase of interest rates. There are voices in the committee asking for a 75bps (0.75%) increase, but given the strong resistance from the region's south, the most likely scenario should be a 50bps (0.50%) hike. Then, the market expects at least another 75-100bps by year's end, to bring short-term rates closer to 1.5%. If this were to materialize at a time when the FED will probably start slowing down or stopping its aggressive rate hikes, it should mark the bottom for the EURUSD exchange rate.
Eurozone's CPI (inflation) for August rose slightly more than expected, at a rate of 9.1%, vs 8.9% in July and expectations for 9.0%. But the region's core countries presented data which were better than feared. Germany's CPI (EU-harmonized) inflation for August was announced at 8.8% on an annual basis, in-line with the expectations and vs 8.5% in July. On a monthly basis inflation rose by 0.4%, after rising by 0.8% in July. France's inflation came in at 6.5% vs 6.8% in July. In Italy, on the contrary, inflation moved further up. A worrying trend, seen lately in Europe and in the US, is the fact that the Core CPI (which excludes food & energy) has started going up again. The Core CPI which is more heavily skewed towards rent, wages etc is considered more "sticky" and harder to come down compared to energy prices which can correct quickly as their prices are detemined primarily in public exchanges.
Electricity prices and the natural gas storage process dominated the news in Europe, last week. Germany announced that it has achieved 85% of its gas collection target two months ahead of schedule, which caused natural gas prices in Europe fall almost 20% in one day, albeit from very high levels. The following days, the G-7, pushed by the US, finally decided to put a cap on the price of oil imported from Russia. Russia immediately responded with an “indefinite’ halt of Russian gas through Nordstream. This "cat-and-mouse" game is going to continue, until one side becomes exhausted. And if there are some initial signs of fatigue, these are to be found among European citizens who saw electricity prices skyrocketing to 1'000 EUR per MWh in France and Germany and the tought winter is still ahead.
Eurozone's unemployment rate fell to a new record low, at 6.6%. As is the case in the US, a strong labor market puts even more pressure on the ECB to act more aggressively, if it wants to bring inflation down by "demand destruction". Or in other words, to engineer an economic slowdown, where inevitably unemployment will have to move higher.
The US labor market weakened finally, in August, but remained at strong levels. The non-farm payrolls were announced at +308'000 in line with expectations, while unemployment rose to 3.7%, slightly higher than the record low of 3.5% in July. The rise in unemployment is due to the increase in the participation rate, i.e. how many people are actively looking for a job. Equally importantly, wage growth remained at the same levels as in July (+5.2% on annual basis) against expectations for a rise of 5.3%.
US Consumer Confidence rose significantly in August, according to the conference board survey. It was the first time in 4 months that consumer confidence does not fall further, but rose to 103.2 vs expectations for 97.4 and 95.3 in July. The recent data concerning the health of the consumer do not yet show any meaningful sign of an upcoming recession, and that is thanks to the strong labor market, which positively affects the income and the spending power of the consumers. But the labor market is a lagging indicator, in the sense that it usually follows the macroeconomic developments, so no real conclusions can be made on a 3-6month basis. Unfortunately, we wil have to wait and see whether the FED engineers a slowdown or makes the economy fall into a recession.
There is no end in China's efforts to curb Covid19 with strict lockdowns. Last week, it was the megacity Chengdu, with 21 million residents which closed down for a few days, due to a local outbreak. Chinese equities have corrected about 8% from their recent highs, primarily due to the continuation of this strategy against the pandemic. The conference of the Communist Party for the re-election of President Xi is fast approaching however (mid-october) and it is crucial for him that the country does not "fall apart" during that time. More economic stimulus and/or a looser Covid19 policy should be ahead of us.
In corporate news, reports from banks which are involved in the expected Porsche IPO spoke for a potential valuation up to 85bn eur, due to very strong demand for participation. As a comparison, we note that currently the total value of the Volkswagen Group (which owns Porsche) is about 85bn eur. This is a huge disconnect, highlighting the deep value in the current pricign of VW stocks.
Chart of the Week :
In France and Germany, it is now more expensive to drive a Tesla
The last three years have been all but normal. First a global pandemic, then inflation in western economies reaching levels of 10%, a war in Europe, a potential rationing of natural gas in Europe in the winter. And who would have thought just two years ago, that the high-technology, all-electric Tesla car would now cost more to "fill" than a conventional, gasoline car. We charted the cost per 100km for the Tesla S and the BMW 3-series, as per the manufacturers' data for consumption and using the average electricity and gasoline prices for the last year. With the spike of the electricity prices this last month, where in France and Germany these exploded to 1'000 EUR per MWh, to drive a Tesla is now more expensive than a good old-fashioned BMW. If prices stay like these, the European consumer will soon find himself facing huge bills both for electricity and heating, a double hit one their incomes.
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• 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.
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• Sources: Chart of the Week : Trading economics, Car manufacturers data