2023 - Week 35
Alessandro Hor
Investment Manager | Fund Management | Compliance & AML | Capital Transactions | Asset Management | Risk Management
Markets’ overview:
Equity markets had a positive week, but August posed challenges for investors. The #NASDAQ closed the week with a strong 3.25% gain, and the #S&P500 also performed well, rising by 2.50%. This positive momentum extended to global equity markets, with the #Stoxx600 index up 1.49%, the Japanese #Nikkei up 3.48%, and the #HangSeng up 2.45%. However, these robust performances weren't sufficient to end August on a positive note. I do expect that these trends will face a test in the coming weeks as market participants return to their desks, and trading volumes, which had been relatively low in recent weeks, normalize.
The #VIX index continued its downward trend, decreasing by 16.5% over the past week to reach 13.09. In contrast, the #Skew Index, somewhat predictably, moved upward to relatively high levels. This suggests that professional and institutional investors have been increasing their position hedging to guard against tail risk events. The #Skew Index closed the week with a 9.08% increase, reaching 144.28 from the previous week's 132.27.
Interestingly, the market seems to be following the "bad news is good news" sentiment. Data from US authorities regarding the job market indicates a normalizing trend, where higher unemployment and lower job creation are viewed as signs of an effective Federal Reserve (FED) monetary policy. This suggests that investors are interpreting economic data through the lens of central bank actions and policies.
US
In the US, July saw a decline in job openings, reflected in a consumer sentiment index of 106.1, signaling possible economic slowing. The ADP National Employment report projected a significant drop in private sector jobs for August, with only 177,000 added, well below expectations. Other signs of a job market shift included a downward revision of Q2 GDP growth to 2.1%, lower wholesale inventories, and higher retail inventories. While pending home sales exceeded expectations with a 0.9% increase in July, they remained down 14% YoY.
Inflation, as measured by the core PCE price index, rose 0.2% MoM and 4.2% YoY in July, driven by a 0.8% increase in personal spending despite a 0.2% rise in incomes. This led to a reduction in the personal savings rate from 4.3% to 3.5%.
Despite an increase of 187,000 nonfarm payrolls in August, the unemployment rate rose to 3.8%, the highest since February 2022, with the "real" unemployment rate reaching 7.1%.
Europe
Eurozone headline inflation popped to 5.3% YoY in August, with core inflation falling 0.2% MoM to the same 5.3% YoY pace.
In August, Germany's inflation, as measured by the Consumer Price Index (CPI), decreased from 6.2% to 6.1% on a yearly basis, slightly surpassing the market's anticipated 6%. On a monthly basis, CPI rose by 0.3%, aligning with both analysts' predictions and the July increase.
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During the same period, the annual Harmonised Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred inflation gauge, increased by 6.4%, a slight drop from the 6.5% recorded in July and below the market's forecast of 6.2%. The monthly HICP also saw a 0.4% rise.
China
China's recent economic support measures initially drove a 5% surge in stocks on Monday. These measures included reduced stock trade levies, restrictions on share sales by major stakeholders, and lower deposit ratios for margin financing. However, this brief market enthusiasm underscores investors' ongoing anticipation of more substantial actions to address China's underlying structural challenges.
Market sentiment appears to be taking a toll on the yuan, with a Bloomberg survey indicating that it may slide to a record low of 7.6 per dollar by year-end, down from 7.29 on Monday.
China's property crisis continues, prompting banks to lower existing mortgage rates to stabilize the market.
Further measures are expected from China, including reductions in banks' foreign exchange deposit reserve requirements, expanded tax incentives, and continued support for the property sector. The central bank is set to decrease foreign currency deposit requirements for banks, marking the first such reduction this year, following additional stimulus for the struggling property sector and new tax breaks for childcare and education.
Definition
HICP
HICP stands for Harmonized Index of Consumer Prices. It is a standardized measure of inflation used within the European Union (EU) to compare price levels among EU member states consistently. The HICP is designed to provide a uniform and comparable inflation rate across different countries in the EU, making it easier to assess and monitor price changes in the region. It includes a specific basket of goods and services, and its calculation follows a standardized methodology to ensure consistency in inflation reporting across the EU. The European Central Bank (ECB) and other economic institutions use the HICP as a key indicator for assessing price stability and making monetary policy decisions within the Eurozone.
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