World equity markets continued the recovery from the June lows until mid-August when concerns about Federal Reserve policy in front of the annual Jackson Hole Symposium took over.
Markets were cheered by the US July inflation data, which came in better than expected, but went easier again after Jerome Powell’s brief but hawkish speech at Jackson Hole. An early September recovery was then dashed by the August US inflation data, which disappointed hopes for a more marked improvement. Hindsight might wonder why US CPI figures of June 9.1%, July 8.5% and August 8.3% created such a stir but, as always, it is all about expectations.
Equity market volatility rather pales by comparison to bond markets, which have seen some extraordinary moves. The US ten-year yield has moved back up to the highs for the year just below 3.5%, the long bond also sits on a 3.5% yield (though the effects of duration mean that the capital fall has been greater here, around 10%). The move in short-dated yields to 3.8% (a fifteen year high) firmly inverts the US yield curve. UK bond markets have followed a similar pattern though the long-dated Gilt has seen an even more dramatic fall of 22% over these six weeks.
Overall, equity markets have weakened 4%/5% with the tech heavy NASDAQ doing the worst with a 6% fall. Japanese stocks provided a rare bright(er) spot with a small gain for the period. The Fed’s rhetoric has also bolstered the US dollar, taking it back up to the highs for the year again.
Technology sectors led the falls with Alphabet, Microsoft and Meta Platforms all showing falls of around 10%, Apple was a comparative bright spot, ‘only’ falling 6% as early reports of the response to their new range was positive. There were notable falls also for Intel, which cut its guidance for the rest of the year, and for HP, which reported dull Q3 figures. It was an equally poor period for a number of the telcos, Telefonica sank 9% and Vodafone 13%.
The consumer discretionary sectors fared better than most with gains for a number of the Japanese car companies along with Tesla and Volkswagen. Amazon.Com fell around 7% and Sony Group also dipped again. The staple goods companies were generally weaker with the market, though Japan’s Seven & i Holdings put in another good performance gaining 11% (one of the small number of stocks to be positive over the year) and Walmart staged a good rally, up 5%, after solid earnings.
The oil majors had a strong move against the market and despite a further fall in the price of oil, BP, Exxon Mobil and Shell gaining 7%/9%. In contrast, the mining companies weakened with concerns over Chinese demand for metals. Practically all the industrials weakened, led by a 20% fall for 3M Company, but it was international, Compagnie de Saint-Gobain fell 9% and Japan’s Recruit Holdings by 10%. Pharmaceuticals were comparatively quiet but Sanofi, GSK and the new Haleon (spun-off from GlaxoSmithkline) were all hit hard by renewed concerns over Zantac litigation (though we understand that the FDA has confirmed that they have found no ‘causal link’ between Zantac and cancer).
The financial sectors provided most of the bright spots, largely cheered by higher rates. The re-insurers featured gains of more than 10% for Munich Re and Swiss Re, re-insurance rates are generally expected to harden over 2023. The insurers also gained, Aviva and Axa by 6%, along with the UK and European banks. The US banks did not fare as well, Citigroup being a notable casualty, down by 7%.
The markets remain in thrall to the inflation data and where that might take Fed (and the other central banks) policy. We expect a further sharp move up (75bps?) in the Fed Funds rate shortly and a similar move by the Bank of England next week. The question remains as to how far the Fed will go and what damage might be done to the US economy in the meantime, with high employment rates it will be a difficult judgement.
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