EXANTE Monthly Macro Insights

EXANTE Monthly Macro Insights

Global markets ended the month lower as the Fed and other key central banks made clear their inflation fighting intentions, global bonds extended their sell-off, and rising energy prices put Europe on the precipice of recession.

January - August 2022 VIX source: Refinitiv

  • Is the Fed accepting a “growth recession?”
  • The battle between the ECB’s hawks and doves
  • Europe’s energy roadmap
  • The merge and crypto regulation under scrutiny

S&P 500   4.25% MTD and  17.02% YTD
Nasdaq 100   5.18% MTD and  24.78% YTD
Dow Jones Industrial Average   3.21% MTD and  12.51% YTD
NYSE Composite 3.43% MTD and  13.77% YTD

Stoxx 600   5.29% MTD and  14.90% YTD
DAX   4.81% MTD and  19.20% YTD
CAC 40   5.02% MTD and  14.37% YTD
FTSE 100   1.88% MTD and  1.36% YTD
IBEX35   3.31% MTD and  9.50% YTD
FTSE MIB   3.78% MTD and  21.16% YTD

MSCI World Index   3.29% MTD and  18.29% YTD
Hang Seng   1.00% MTD and  14.72% YTD
Bitcoin   15.53% MTD and  56.32% YTD

Note: As of 5:30 pm EST 31 August 2022

The Fed abandons the soft landing scenario. The much awaited speech from Fed Chair Jerome Powell at the Jackson Hole, Wyoming Economic Symposium made clear that the Fed is going to take whatever steps necessary to contain inflation. This has led some investors to believe the Fed is willing to have a longer period of slower growth and rising unemployment, a “growth recession.” Treasury yields have risen and the USD has also strengthened against the EUR, the GBP and the YEN. Rising volatility in August led to Tech stocks like  AlphabetAmazonMeta PlatformsMicrosoftNvidia Corporation, and Tesla falling. Energy stocks such Occidental PetroleumMarathon Oil CorporationHalliburton CompanySchlumberger LimitedDevon Energy CorporationExxon MobilChevron Corporation and Valero Energy Corp. generally ended the month up although the anticipated slowdown and subsequent fall in demand is expected to impact them. However, renewable producers like SunrunFirstSolarPlug Power and TPI Composites Inc. received a boost in August with the signing into law of the $430 billion Inflation Reduction Act which promises a decade of federal subsidies via long-term tax credits for solar panel makers, fuel cell manufacturers and energy storage companies, biogas and hydrogen producers. Retail stocks such as WalmartTargetCostco Wholesale Corp.Best BuyDollar General Corporation, and Dollar Tree also experienced a difficult month as inflation bites into consumer discretionary spending. 

ECB under pressure. Euro-area inflation reached an all-time high in August at 9.1% y/o/y, strengthening the case for the ECB to consider a 75bps rate hike when it meets next week. Money markets have already priced in a roughly 80% chance for a 75 basis point interest rate hike. Inflation continues to be driven by rising gas prices and is being exacerbated by the summer’s drought, ensuring that further price rises are likely to occur throughout the Autumn. 

Can Europe’s energy plans keep the lights on? The European Commission said on Tuesday that it was developing short-term measures such as gas price caps and guidance on windfall taxes on energy companies to cut the impact of higher energy prices on consumers and industry. Commission officials said the proposed measures were likely to be put forward at an emergency meeting of EU energy ministers on 9 September. The EU is working on structural reform of its energy market which will sever the link between gas and electricity costs, according to Commission President Ursula von der Leyen. Proposals for this are expected early next year.

The merge and new regulations are coming. Crypto investors are waiting for the much hyped “merge” now expected around mid-September, when Ethereum is due to move to proof-of-stake from proof-of-work, which should make the Ethereum network faster and more energy-efficient. However, it is not without risk as mistakes could affect the thousands of crypto applications that operate using Ethereum, which collectively, according to the New York Times, handle more than $50 billion in user funds. Meanwhile the differences between UK and European crypto rules is becoming clearer with the European markets in crypto-assets (MiCA) having a wider definition of “crypto asset” and seeking to regulate all of it, while the UK appears to be focusing, for now, on regulating a narrower class of “digital settlement assets''. According to the Financial Times, differences in regulation will extend to service providers with the UK likely to focus on fewer services, such as exchange and custody. Mica’s definition covers trading, advice, transmitting orders and more, as well as custody and crypto-to-crypto and crypto-to-fiat exchange.

Key events in September 

3 September 2022 OPEC+ meeting. Markets will be looking to see if the group will keep output unchanged for September or  cut production, as suggested by Saudi Arabia on 22 August when it said that OPEC stands ready to cut output to correct a recent oil price decline driven by poor futures market liquidity and macroeconomic fears. In a report issued on Wednesday, OPEC+ said the oil market will likely see a bigger-than-expected surplus this year at 900,000 bpd, up 100,000 bpd from previous forecasts, as rising inflation and tighter global monetary policy put downward pressure on oil demand. At its last meeting, OPEC+ agreed to raise production targets by 100,000 bpd for September.

8 September 2022 European Central Bank Monetary Policy meeting.  Will the ECB be willing to consider a 75 bps rate increase to fight inflation and potentially re-anchor expectations as some policymakers have suggested or will it remain more focused on recession risks?  Although consumer confidence was slightly up in August to -24.9 in August of 2022 from a record low of -27 in July, the pressure will be on as the Eurozone S&P Global's final manufacturing PMI dipped to 49.6 in August from July's 49.8 and inflation is still expected to rise.

11 September 2022 Sweden General Election. It appears that there will be a close-fought race between the ruling left-wing block and the right-wing opposition to form the next government. Support for the populist Sweden Democrats has increased from 19.3% in June to 20.7% in August while the Moderate Party has 16.6% in August, down from 19.6% in June, according to the latest Ipsos polls. This change reflects concerns about Sweden’s immigration policies following the inflow of refugees in 2015 when Sweden took in the largest number of refugees per capita.

15 September 2022 Bank of England Monetary Policy meeting. With Its own forecasts in August projecting that inflation will reach 13.3% in Q4 and remain above 9.5% through next year as gas and electricity prices are scheduled to rise again in October and January, along with a five quarter recession, means a lot will be expected during this meeting. The GBP fell 4.5% in August to $1.16, the biggest monthly drop since October 2016. It also fell almost 3% against the EUR. The BoE has been criticised for not being as aggressive in fighting inflation as the Fed nor as clear in its communication and the new government, due to be declared next week, has hinted at changing the Bank’s mandate. The continuing energy crunch and the associated rise in inflation means the BoE is expected to intensify the tightening cycle which is already causing gilt yields to soar as the uncertainties of fiscal policy under a new government come under scrutiny. 

20-21 September 2022 Federal Reserve Meeting. The Fed is widely expected to raise rates 75 bps again during this meeting, as a still strong labour market and rising wages feeds into inflation. The challenge will be slowing the economy down enough without tipping the economy into recession, as it can easily be tipped into recession with another unexpected shock.  

25 September 2022 General Election Italy. A general election will be held following the collapse of the government in July 2022. Anti-establishment and right-wing parties lead in the polls which suggests that the relative stability under Prime Minister Mario Draghi, may not continue. The state of the economy, rising energy prices and inflation will likely be critical issues in the run-up to the election.

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