EXANTE Macro Insights

EXANTE Macro Insights

A hot and stormy summer ahead for markets

US stock markets rallied this past week due to largely good earning reports while Europe burned from a heatwave and political turmoil 

  • The ECB makes it move
  • Fed watch
  • We’re in the money, for now
  • Crypto feels the heat

US:
S&P 500 is down 16.14% YTD
Nasdaq is down 22.92% YTD
Nasdaq 100 is down 22.73% YTD.
Dow Jones 12.28% YTD

Europe:
Stoxx 600 is down 13% YTD
DAX is down 16.61% YTD 
CAC40 is down 13.31% YTD 
IBEX35 is down 8.05% YTD 
FTSE MIB is down 22.49% YTD
FTSE100 is down 1.54% YTD

Global:
MSCI World Index is down 18.39% YTD
Bitcoin is down 50.3% YTD

Note: As of 6:30pm EST 21 July 2022

Is the ECB action enough? On Thursday the ECB finally raised interest rates taking a bolder than anticipated 50 bps.with ECB President Christine Lagarde saying that there remained “upside risks” to inflation. Despite the rate hike, EUR ended the day up only by 0.27% to $1.0204 as investors also worried about the lack of forward guidance from the ECB and the lack of clarity around the new Transmission Protection Instrument (TPI). Eurozone inflation hit a record high 8.6% in the year to June and, despite Nordstream 1 being back online, Europe is facing a recession shock with the proposed cut by the European Union that the bloc cut its natural gas consumption by 15% over the next eight months in a bid to reduce its dependency on Russian energy. This would clearly affect consumers, energy providers, and industry. There is also the political crisis in Italy and its growing debt burden that puts belief in the TPI at risk even before its implementation. Although the ECB says the size of bond purchases with durations of one to 10 years under TPI will have no limitation as long as the countries needing it have not fallen foul of the EU’s fiscal and recovery fund rules which include structural reforms. It is difficult for markets to see how this would effectively work when the ECB is also saying rates would rise further in future meetings this year.

Fed tightening. It is widely anticipated that the Fed will raise interest rates by 75 bps next week in an attempt to curb inflation. The Fed rate decision will be followed by crucial Q2 GDP data which may be negative again (although likely to be revised). A recession might lead investors to believe that the Fed will ease the pace of its aggressive interest-rate hikes. However, even though the claimant count rose 7,000 to a seasonally adjusted 251,000, the highest in eight months this past week, it does not mean that recession is immediately happening: hiring has remained robust, with 372,000 jobs created in June. And, according to US labour department June data, there are only 3.6 million part time workers, just 2.2% of the overall labour force. This is down 25% from June 2019, ahead of the pandemic and the lowest level since 1955. So a continuing tight labour market will help to fuel consumer demand even if inflation is starting to erode consumer confidence. 

Global markets rely on earnings. As the U.S. corporate earnings season rolls along, 91 companies in the benchmark S&P 500 index have reported quarterly results, with 78% topping expectations, according to Refinitiv data. Tesla shares surged 9.8% posted, late on Wednesday, better-than-expected quarterly results. Tech companies were up this past week including  Nvidia, Amazon, Apple, Cloudflare and Tencor Corporation. However, there are significant risks on the horizon with growing food and energy insecurity, depreciating currencies, and looming debt crises in Europe and in some Emerging markets. We are also still feeling the effects of the ongoing COVID-19 pandemic, the reality of climate change is becoming far more obvious as heatwaves and droughts hit key markets, and continuing armed conflicts will add to geopolitical and market volatility. 

Crypto mining hit by climate change. Crypto has often been criticised as non-environmentally friendly given the large energy resources needed to mine it. However, this week nature bit back. Crypto miners that had moved to Texas, USA due to its welcoming regulatory environment and low energy prices, were suddenly, according to Bloomberg forced to turn off their machines under a non-binding agreement made with the state grid managers to ease the strain on the state energy grid caused by a heatwave where temperature are topping 44℃. This combination of rising global temperatures, and the greater strain it will cause on energy systems means that regulators around the globe may start to reconsider just where and under what rules they will allow crypto miners to operate. 

Key data to look out for this coming week 

In Europe: Eurozone S&P Global Composite PMI, Services PMI and Manufacturing PMI data on Friday. On Monday look out for German Ifo Business Climate and Expectations, critically important for Europe’s largest economy as it faces possible energy rationing. This will be followed on Wednesday with German GfK Consumer Confidence survey data. On Thursday there is Eurozone Business Climate and Consumer Confidence survey data as well as German Harmonised Index of Consumer Price data, which is a very important inflation indicator. 

In the US: On Monday look out for the Chicago Fed National Activity Index, on Tuesday housing price index data, new home sales data, and Consumer Confidence data. On Wednesday tall eyes will be on the Fed’s interest rate decision. There will also be durable goods and non-defense capital goods orders. This will be followed on Thursday by GDP data, personal consumption data, and initial jobless claims data. 

In the UK: Retail sales data, S&P Global/CIPS Composite PMI, Services PMI and Manufacturing PMI data on Friday.

Also, after a slight delay due to Covid, look out for the announcement of the winner of the €10,000 EXANTEN Prize in next week’s monthly. This prize was based on the best estimation and analysis of where and why 5 of the world’s biggest indices would be on 31 May 2022. 

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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