Privatus Morning Briefing (Monday, September 19th, 2022) - No Place To Hide

Good morning all,

Stocks are mixed from the open of Asian trading on Monday after global equities notched their worst week since the market hit its low for the year in June. Trading may be muted by a holiday in Japan and the UK observing a day of mourning for Queen Elizabeth II, with no trading in cash Treasuries during the Asian and European sessions. US stock futures are more or less flat while contracts for European shares are up so far.

Investors also face potential volatility from policy decisions this week by the Bank of England, the Bank of Japan and a host of other central banks. The British pound sank to its weakest level against the dollar since 1985 on Friday and the yen remains under pressure, though it has backed off from just below the key 145 level versus the dollar.

More details, and market closes, below:

What Happened Overnight?

• The?S&P 500 index fell almost 5%?last week in its worst performance since June 17 while the rate sensitive?2-year Treasury yield ended at 3.87%. The weakness in markets reflects expectations for an outsized interest rate hike from the Federal Reserve on Wednesday and worries that its aggressive tightening to quell inflation will trigger a recession.

• Battle-weary investors are finding?few refuges. They now must contend with a hawkish Fed meeting amid historically a terrible month for equities. University of Pennsylvania and University of Hong Kong researchers found that stocks, bonds, commodities and REITs are all exposed to losses when core inflation unexpectedly rises.

• Goldman Sachs cut its US 2023 GDP outlook?to 1.1% from 1.5% after increasing its Fed hike forecasts. "This higher rates path combined with recent tightening in financial conditions implies a somewhat worse outlook for growth and employment next year," economists including Jan Hatzius wrote. The bank lifted its year-end jobless rate estimates for this year and next to 3.7% and 4.1%, respectively.
• Volkswagen?set a?valuation?target of as much as €75 billion for the Porsche IPO, people familiar said. The carmaker is selling a 25% total stake, divided into 911 million shares, with the price range set at €76.50 to €82.50. The valuation is below a previous top-end target of as much as €85 billion, but would still make the listing one of Europe's biggest.
• Biden joined world leaders in London?for Queen Elizabeth II's funeral on Monday. King Charles III hosts a reception at Buckingham Palace on Sunday evening for the assembled dignitaries. Liz Truss will meet the US president on Wednesday at the UN General Assembly, postponing a meeting scheduled for Sunday, Politico reported. London markets are closed until Tuesday.
• Storms in the Pacific and Atlantic.?Typhoon Nanmadol slammed into southern Japan, causing blackouts, paralyzing transportation and prompting the evacuation of thousands of people, the AP reported. The government had urged millions of residents to evacuate. Hurricane Fiona knocked out power to all of Puerto Rico and threatened parts of the Dominican Republic with winds of 80 miles per hour and flash floods. The Biden administration approved an emergency declaration for Puerto Rico, which is expected to get 12-16 inches of rain.
• Chart of the Day:?China's heated rivalry with the US over tech supremacy is adding fresh pain to the world's second-largest stock market. From biotech to EVs, shares of key Chinese manufacturers have seen heavy selling recently as American initiatives to secure domestic supply chains and solidify its industrial superiority raised uncertainties. The MSCI China Index has fallen more than 7% this month, versus a 2.5% drop in the global gauge.

Ukraine:

• Joe Biden warned Vladimir Putin of a "consequential" US response if the Kremlin uses nuclear or chemical weapons.
• In an interview with CBS, the US president also said he cautioned Xi Jinping that it'd be a "gigantic mistake" to violate sanctions imposed on Russia, but that there's no indication that Beijing has provided weapons to Moscow.
• On the ground, Ukraine pressed its offensive in the northeast, with its military claiming that some Russian units lost 50% to 90% of its personnel during the recent retreat in Kharkiv.

What's Coming Up This Week?

• Central banks launch?a rapid-fire attack on inflation this week, with three days of rate decisions expected to deliver increases of more than 500 bps combined.

1. US Federal Reserve?policy makers are expected to approve another jumbo interest-rate increase during a two-day meeting that wraps up on Wednesday, as they struggle to tamp down demand (Wednesday).
2. The?Bank of England?is likely to follow suit the next day at a meeting delayed for a week (Thursday).
3. The BOJ may hold?in Asia as it awaits stronger wage growth, Bloomberg Economics said. It expects policy makers to maintain yield-curve settings.

• UK markets and government agencies?are closed?on Monday?as the country welcomes global dignitaries for the funeral of Queen Elizabeth II, who died on Sept. 8 at age 96. The services will be streamed and broadcast around the world.
• Big-bank CEOs including?Jamie Dimon?of JPMorgan Chase?and?Brian Moynihan?of Bank of America?testify?before the US House Financial Services Committee at a hearing titled, “Holding Megabanks Accountable” (Wednesday).
• Energy crisis:?Europe's final proposals, including on market interventions and demand management, may take shape this week as energy ministers prepare to meet on Sept. 30. Germany's seizure of a local Rosneft unit last week may also precede a flurry of moves aimed at reshaping the sector.
• UK Chancellor Kwasi Kwarteng delivers a mini budget on Friday that may estimate the cost of Liz Truss's energy support package. Flash PMI surveys for the euro-area and UK will also provide more insight into the likelihood of recession (Friday).
• Even as a looming?US rail strike may be narrowly averted,?dockworkers at the UK’s Port of Liverpool?are set to?begin a two-week stoppage?on Tuesday at the nation’s fourth-biggest gateway (Tuesday)
• Earnings for the week?include?Accenture, AutoZone,?Costco Wholesale,?General Mills?and home-builder Lennar.

Any Further Thoughts, Vinod?

• Not a lot to add to what I have mentioned before. "No place to hide" seemed an appropriate summation of the current position that investors find themselves in as every major asset class takes a beating. Equities, Bonds, Commodities are all down on a combination of Rate hike cycles, fading corporate earnings outlooks (FedEx last week was widely seen as the canary in the coalmine) and recession-causing demand destruction.
• Treasuries traders?will be closely watching the revised Fed dot plot. The expected peak in rates has risen by more than a full point to 4.5% since the last meeting, and some hawkish investors are even betting on 4.75%-5.25%. The last update showed officials see rates mostly below 4% for 2022-2024.
• Not a lot of good options for a money manager, I have to tell you - not much point varnishing the truth.

1. Staying in cash?is one decent bet, except that?Inflation makes it effectively a guaranteed loss.
2. May as well go for a possible profit by staying invested -?defensive equities,?short-dated high quality bonds?and?macro strategies?have been my mantra for a while now.

Happy Monday! Today is likely to be the only quiet time we'll get this week. Stay strapped in for what's likely to be an even more volatile than usual ride this week.