EXANTE Quarterly Macro Insights

EXANTE Quarterly Macro Insights

An overview of Q3 2022

The third quarter of 2022 saw global markets under pressure as investors reacted to both the growing likelihood of further and higher interest rate rises and an increased risk of global recession. As a result, both shares and bonds turned lower and had negative returns for Q3. However, global inflationary pressures did ease on the back of lower oil and food prices. The WTI (West Texas Intermediary) oil price was down almost 27% and Brent crude, the global benchmark, was down about 21% in Q3. The Food and Agriculture Organisation (FAO)‘s Food price index continued to fall in Q3, registering its fifth consecutive monthly decline in August. However, despite the latest drop in August, the index remained 10.1 points  or 7.9% above where it was a year ago. With tight labour markets in the US, UK and across Europe, demand-pull inflation is starting to concern central bank policy makers.

US indices:
The S&P 500   5.18% in Q3 2022 and  20.46% YTD.
The Nasdaq 100   4.58% in Q3 and  29.21% YTD.
The Nasdaq   4.08% in Q3 and  28.85% YTD.
The Dow Jones Industrial Average   5.04% in Q3 2022 and  16.57% YTD. 
The NYSE   7.01% in Q3 and  16.91% YTD.

European Indices:
The Stoxx 600   4.75% in Q3 and  17.38% YTD. 
The DAX   5.24% in Q3 and  21.20% YTD.
The CAC40   2.71% in Q3 and  16.32% YTD.
The IBEX 35   9.04% in Q3 and  13.01% YTD.
The FTSE MIB   3.03% in Q3 and  21.89% YTD. 
The FTSE 100   3.84% in Q3 and  4.49% YTD.

Bitcoin   56.84 % YTD.
Ethereum   63.51% YTD.

Note: As of 5:00pm EDT 5 October 2022

After a strong rally in equity and bond markets in July, both asset classes sold off in August and September, leading to developed market equities falling about 6% over the quarter. Concerns emerged over Q3 that global economic growth was headed for a slowdown, with recessions in the UK and Europe anticipated as persistently high inflation, surging energy prices and rate rises are hitting consumer demand, business confidence and, will eventually, also affect corporate earnings. The view for the US remains dependent on the ability of the Fed not to overshoot on tightening rates over the next few meetings. The Fed had forecast that unemployment would likely rise from 3.7% to 4.4% in 2023 as it tries to get inflation down. The softness of the landing will depend on just how strong household and corporate finances remain. All market sectors were affected in Q3 as stock markets entered bear market territory with the most volatile sectors being growth and tech stocks like  AlphabetAmazonTeslaTwitterMeta PlatformsNvidia and Apple. The weakest sectors were the communication services sector and real estate including Digital Realty TrustVornado Realty TrustD.R. Horton, Inc., and Ventas, Inc. Given the ongoing energy crunch in Europe and supply concerns, the energy sector, including Marathon Oil CorporationDevon Energy CorporationConocoPhillipsCoterra Energy Inc.Baker HughesExxon MobilOccidental PetroleumSchlumberger Limited, Diamondback Energy and Halliburton, proved to be among the most resilient.

The Eurozone continued to be negatively affected by the crisis in Ukraine, the ongoing energy crisis, rising inflation, and growing concerns about the rising likelihood of recession.  Every sector posted negative returns, with the real estate sector in particular being hit by rising bond yields. The ECB raised rates in July and September, bringing the benchmark to 1.25%.

In the UK, inflation remained elevated in Q3. Although headline CPI decreased very slightly in August from 10.1% to 9.9%  y/o/y, core CPI increased from 6.2% to 6.3% y/o/y. A new party leader and new Prime Minister, Liz Truss was elected by the Tory party in September. The new government announced a “mini- budget”, a new fiscal package, shortly after taking office, which was very poorly received by markets; it sent Sterling to an all-time low against the US dollar ($1.03). With the gilt market suffering significant losses as treasury yields surged, the BoE intervened by temporarily buying long dated gilts to prevent pension funds from collapsing and ensure financial stability.

In Asia ex-Japan, equity markets were down over Q3 on investor concerns over rising inflation, higher interest rates and fears over a global slowdown. China also underperformed; the slump in the property market weighed on investor sentiment and the imposition of Covid-related lockdowns had a negative impact on domestic demand. Rising geopolitical tensions between North Korea, the US and Japan as well as ongoing tensions between China and Taiwan will continue to weigh on investor sentiment.

Emerging markets (EMs) equities declined over 11% in Q3 and are down about 27% YTD as the strengthening USD and rising real interest rates has hit their economies.

USD strength hitting global currencies
Expectations of faster monetary tightening in the US has also contributed to a continuing strengthening of the dollar. The EUR fell below parity and is down around 13% YTD against the US dollar, the GBP is down around 16.7%, and the YEN is down almost 26% YTD. It is really negatively impacting Emerging market currencies, putting pressure on their foreign currency debt and hitting commodity exporters. Dollar strength is expected to continue through Q4 as the Fed remains committed to curbing inflation with more interest rate hikes. It will take a significant level of softening of the labour market and a series of falls in core inflation before the Fed slows down. 

What to keep in mind for Q4 2022

For Q4 2022 there are a number of issues to worry investors: energy insecurity in Europe, global recession risks increasing on the back of rising interest rates from global banks, and cuts by OPEC+ despite growing expectations of rising demand in Asia in 2023 as China slowly emerges from its Covid induced economic slumber are but a few. The high levels of volatility in bond and currency markets seen in Q3 have helped lay the groundwork for greater global financial stability uneasiness. What is becoming increasingly clear is that the global economy is slowing and this will be felt in Q4 and into 2023. The WTO’s latest forecast has trade growth falling sharply in 2023 to 1%, compared with its previous forecast of 3.4%, It says global merchandise trade will slow next year as “multiple shocks” ranging from the crisis in Ukraine, high energy costs in Europe and US monetary policy tightening raise manufacturing costs and squeeze households. Markets have priced in an aggressive path of future rate hikes, with rates now expected to rise to about 4.5%, 3.5% and over 5% by next year in the US, Europe and UK respectively.

The potential policy and geopolitical risks for investors that could hit currencies, and stock performance as well as affecting bond markets and alternative asset classes like cryptocurrencies include:

16 October 2022 20th National Congress of the Communist Party of China. The National Congress is held every five years. President Xi Jinping will most probably try to consolidate his power and extend his leadership. Energy, economic and environmental issues will also likely be discussed.

27 October 2022 Bank of Japan meeting. The BoJ has remained steadfast in its loose monetary policy as other global central banks have been forced to take increasingly more aggressive actions to combat inflation. However, the interest rate differential with the US has widened sharply and been a significant factor in the consistent weakening of the yen. On 22 September the Ministry of Finance did intervene directly in currency markets when the yen was seen as depreciating far too rapidly. This was the first such direct intervention in support of the yen since 1998. The inflation rate in Japan rose to 3.0% in August, the highest level since September 2014, on the back of rising prices of food and raw materials as well as yen weakness. This may cause difficulties for BoJ governor Haruhiko Karoda if he seeks to maintain the ultra low policies moving forward as the weakening yen will negatively impact households and businesses and may become politically untenable.

27 October 2022 ECB meeting and monetary policy decision. Various ECB policy makers, including ECB President Christine Lagarde, have reiterated that the ECB  “will do what we have to do, which is to continue hiking interest rates in the next several meetings.” Headline inflation hit 10% in September while the Eurozone labour market remains strong, with unemployment holding at 6.6%. The downturn in business activity across the eurozone worsened in September with the S&P Global Composite PMI  to 48.2 from 48.9 in August, the third month below the 50 level.

1-2 November 2022 US Federal Reserve Monetary Policy meeting. Fed Chair Jerome Powell admitted that “no one knows whether this process will lead to a recession or if so, how significant that recession would be,” and that “the chances of a soft landing are likely to diminish because monetary policy needed to be more restrictive or restrictive for longer.” The economic projections given at the September meeting have growth at only 0.2% this year and 1.2% in 2023, unemployment rising from the current 3.7% to 4.4% in 2023 until the end of 2024. It’s still estimated to be at 4.3% in 2025.

3 November 2022 Bank of England Monetary Policy meeting and monetary policy report. Following on from the BoE’s intervention in bond markets in early October, when it decided, in an attempt to alleviate gilt market volatility and preserve financial stability, to engage in temporary purchases of up to £65 billion of long-term sovereign bonds and delay the planned sale of its gilt portfolio, the market will be looking for significant rate rises.  Inflation is expected to remain at around 11%, despite the government's energy subsidies. The labour market remains tight with the unemployment rate falling  to 3.6% in July, its lowest level since 1974. However, private sector wage gains are now running at 5.5%. The Bank is facing increasing external pressure as the UK’s credit rating, following the BoE’s Gilt market intervention, has been downgraded by two ratings agencies, Fitch and S&P which put the country on a “negative” outlook. Fitch said that the large, unfunded tax cuts announced as part of the government’s mini-Budget could result in significant increases in fiscal  deficits in the medium term, while creating an immediate tension between monetary and fiscal policy given high inflation.

3-4 Nov 2022 G7 Foreign Ministers summit. The foreign ministers of the G7 member states will meet in Munster (Germany). The Russia-Ukraine conflict, growing geopolitical tensions in Asia, and the worsening economic and energy outlook as the Northern hemisphere heads into winter will in likely be key topics of discussion.

8 November 2022 US Midterm elections. Elections will be held for all 435 seats of the House of Representatives and 35 of the 100 seats in the Senate. This is the first national election since the highly divisive 2020 presidential election and the consequent 6 January storming of Congress.. It is likely, based on recent polls, that  the Republicans will win a majority in the House of Representatives. Latest polls, as discussed in the New York Times, note that the race for the Senate is also getting much closer. Much will depend on how voters respond to the biggest political change in fifty years, the de-legalisation of abortion across all of the US.

15-16 Nov 2022 G20 leaders’ summit. The 17th G20 Heads of State and Government Summit will convene in Bali (Indonesia). The summit will focus on the Ukraine crisis and the energy crisis, the global economy as well as equitable COVID-19 vaccine access.

13 December 2022 US Federal Reserve Monetary Policy meeting. aDebate will continue over the Autumn to see if core inflation has fallen sufficiently for the Fed to slow down its rate rise agenda. Markets will remain wary of an overshoot and will be watching labour market numbers and related wage increases as well as consumer confidence, business sentiment, and the mortgage market closely.

15 December 2022 ECB meeting and monetary policy decision. The ECB will continue to be data led but there will likely be increasing disagreement internally as the differentiation in growth and inflation becomes more apparent over Q4.

15 December 2022 Bank of England meeting and monetary policy decision. Much will depend on how markets  react to the new spending plans that are now expected from the government before 23 November, the original date given. If there is a lack of clarity around debt levels, the market may yet again force Sterling downwards and require more aggressive  action from the BoE. 

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication. 

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