Privatus Morning Briefing (Thursday, August 18th, 2022) - Wile E. Coyote Market?

Good morning all,

All good things must come to an end, and this holds true both for my summer break as well as your reprieve from my periodic musings!

The intervening weeks as you have no doubt noticed, have seen a solid rally for risk assets. Perhaps the moral of the story is that I need to take more breaks. It is tempting to test that theory by taking off again in September, since IMHO the risks are building for an imminent end to what is still likely to be a bear market rally. More on this later in this piece.

Meanwhile, the main event overnight was the?release of the minutes from the last FOMC meeting. These signalled that the central bank faces a delicate balancing act to quell inflation while averting recession. Fed officials saw a need to eventually?dial back?the pace of interest-rate increases and warned against over-tightening that could hurt the economy, but also flagged the risk of inflation pressures becoming entrenched.

Asian stocks and US equity futures have retreated?this morning so far, as investors assessed this as well as?a gloomy Chinese economic outlook. Equities are down across Japan, South Korea and Australia. Overnight, Wall Street shares declined for the first time in four days, including a more than 1% drop in the tech-heavy Nasdaq 100 index.

Treasuries?climbed, lowering the 10-year yield to about 2.87%. Yields in Australia and New Zealand have jumped in the slipstream of a day-earlier bond selloff sparked by?surging UK inflation. The?Dollar Index?was steady. More details, and market closes, below:

What Happened Overnight?

• Fed officials agreed last month?on the need to eventually dial back the pace of rate hikes, but also wanted to gauge how the ripple effect of their monetary tightening was working toward curbing US inflation, minutes show. While all FOMC members backed the 75-bp hike, many saw a risk to over-tightening despite price increases being "unacceptably high."
• US stocks ticked down again?after coming off lows after the statement, with investors assessing the path forward for hikes. The S&P 500 closed down 0.7%, with the Nasdaq underperforming. Two-year Treasury yields trimmed most of their surge, and the dollar pared gains. Gold stayed in the red, oil wavered and Bitcoin fell. Asian equity futures are mixed.
• "Not accurate."?Tencent's chief strategy officer pushed back against a report that it intends to sell all or much of its $24 billion stake in Meituan.?Meituan shares gained in US trading, having plunged on the initial news.?Tencent itself reported its first-ever revenue decline?after online ad sales fell by a record amid China's worsening economy. Tencent's quarterly job numbers fell for the first time since 2014, too
• Oil settled higher?after bullish US data eased concerns about dropping demand, ending three days of declines driven by Iran-deal optimism. US crude holdings unexpectedly fell by 7.06 million barrels last week, with exports surging to a record, the EIA said. Additionally, OPEC's new Secretary-General Haitham Al-Ghais said there's a high chance of a supply squeeze this year, in part because fears of slowing usage in China are exaggerated

China economic clouds:

• Goldman cut its China GDP growth outlook?for this year to 3% from 3.3%, pointing to weak July data and recent electricity shortages
• Nomura did the same, only more so,?cutting to 2.8% from 3.3% earlier
• Vice Premier Han Zheng urged measures to ensure?power supply, even as?Chongqing limited use by industrial firms?for a week
• Meanwhile, Chinese?seven-month fiscal revenue fell 9.2% year-on-year, with?local governments' land-sales income plunging 32%

Fund & Corporate news:

• Bridgewater has unwound most of its huge short wagers against European stocks. It cut disclosed short positions to $845 million from as much as $10.5 billion in June. The firm is still shorting three companies in Europe, down from 28 at one stage
• Meantime,?bond funds are zeroing in on longer-dated Treasuries?as Fed officials' comments on their commitment to bringing down inflation raise the prospect of another jump in yields
• Chip stocks slid after?Analog?warned that economic uncertainty is starting to weigh on orders. The company dropped 5%?

Chart of the Day: Emerging or Submerging? Policy makers in?developing nations are burning through?the equivalent of?more than $2 billion of foreign reserves every weekday?in an attempt to prop up their currencies against the dollar. In total this year, they've drained reserves by $379 billion. But these efforts have done little to stabilize FX markets in the most vulnerable countries, with 36 currencies having lost at least a 10th of their value this year

What's Coming Up Today?

• US Economic Data: existing home sales, initial jobless claims, U.S. Conference Board leading index
• More Rate decisions?- from Norges Bank (Norway), plus a host of EM Central Banks - Pakistan, Egypt, Sri Lanka, Turkey
• More?Corporate Earnings:?Estee Lauder, Adyen,?Applied Materials, Gazprom, Geely Automobile

Any Further Thoughts, Vinod?

• Multiple Risk factors?at the moment for the current market rally, not least the annual Central Banks confabulation?next week?at?Jackson Hole. A reiteration of the inflation assessment and consequent Fed rate path might change the current optimistic market narrative once again.
• The?markets are technically overbought?in the short term as well
• Detailed thoughts being prepared - will post more next week

Meanwhile, Happy almost-Friday, have a good one.