Recession winds blowing in

Recession winds blowing in
  • The strong USD: bad for the world? 
  • The ECB talks tough
  • The Bank of England’s futile fight?
  • Regulation may raise the value of Crypto
  • Key data for the coming week

US:
S&P 500   1.78% QTD and  21.99% YTD
Nasdaq 100   0.13% QTD and  29.60% YTD
Dow Jones Industrial Average   5.33% QTD and  19.82% YTD
NYSE   4.52% QTD and  19.41% YTD 

Europe:
Stoxx 600   4.37% QTD and  20.17% YTD
DAX   4.70% QTD and  23.30% YTD 
CAC 40   2.67% QTD and  19.40% YTD 
IBEX35   8.11% QTD and  14.59% YTD 
FTSE MIB   2.07% QTD and  23.75% YTD
FTSE 100   2.29% QTD and  5.13% YTD

Global:
MSCI World Index   6.21% QTD and  25.85% YTD
Bitcoin   2.51% MTD and  57.47% YTD
Ethereum   13.90% MTD and  63.35% YTD

Note: As of 5:30 pm EDT 28 September 2022

Can the dollar keep rallying? The USD continued to strengthen this week against the EUR, the GBP and the YEN as well as many EM currencies, e.g., the Thai Baht, the Singapore Dollar, and the South African Rand, as investors focused on just how high rates may go. The Fed, although aware of the consequences of an overly strong dollar on the US economy, is still talking up future rate hikes as it promises to battle inflation. This is causing havoc for other global central banks who must react in the same vein or risk depreciation and even higher inflation.

This week saw investors reacting to the rising dollar and rising rate outlook with real estate stocks  including Digital Realty TrustVornado Realty TrustD.R. Horton, Inc., and Ventas, Inc.

It's been a particularly volatile week for health stocks such as ModernaPfizerVertex PharmaceuticalsJohnson & JohnsonAbbvieEli Lilly and CoMerck & Co Inc and Bristol-Myers Squibb.

Energy stocks were also  as growing global recession fears hit the demand outlook including Marathon Oil CorporationDevon Energy CorporationConocoPhillipsCoterra Energy Inc.Baker HughesOccidental Petroleum, and Halliburton.

The ECB prepares to “do whatever it takes.” On Wednesday, ECB President Christine Lagarde said that the ECB “will do what we have to do, which is to continue hiking interest rates in the next several meetings.” At least half a dozen other ECB policymakers have come out in support of a 75 bps hike at the October meeting including Finland’s Central Bank Governor Olli Rehn, Lithuanian Central Bank Governor Gediminas Simkus, Latvian Central Bank Governor Martins Kazaks, and Estonian Central Bank Governor Madis Müller. This comes as Economic and Consumer sentiment in Europe continues to fall with the EC’s monthly economic index falling to 93.7 points in September from a downwardly revised 97.3 in August. Households' confidence fell to -28.8 points from -25.0, as consumers expect a poorer financial situation over the next months.

The BoE is forced to step in. Following on from the release of last Friday’s mini-budget which caused the GBP to plunge to the lowest level ever recorded and sent borrowing costs soaring, the BoE was forced to purchase long dated Gilts to try to stabilise the market and stop yields spiralling. It acted, it said, due to the “material risk to UK financial stability” caused by this turmoil in the Gilt market. The BoE said it will buy as much as £5 billion a day of long-dated government bonds until 14 Oct (up £65 bn of bonds). It spent about £1 billion pounds on Wednesday. This desperate action however, may not be enough to maintain Sterling and reduce bond market volatility as investors are still cautious over the government's insistence on continuing through with its fiscal policy plans which, to many, will contribute to inflation and leave the UK exposed to an ever higher likelihood of a deeper recession. As the BoE has not, as of yet, signalled further intervention, traders will be looking for a “significant” rate hike at the BoE’s next meeting on 3 November to maintain credibility. There is also the fear that the market could interpret these actions as simply bankrolling the government.

How a regulated market could help Crypto prices. US Commodity Futures Trading Commission (CFTC) chairman Rostin Behnam said this week that Bitcoin might “double in price” if it traded in a CFTC-regulated market. He noted that “incumbent institutions in the crypto space see a massive opportunity for institutional inflows that will only occur if there’s a regulatory structure around these markets.” The CFTC is looking to the recent bill in the US Senate that, if passed through both houses, would clarify the CFTC’s funding model and resources. It would make the CFTC the primary regulator for the crypto industry in the US, expanding the agency’s authority to oversee crypto spot markets and requiring crypto trading firms to register with the CFTC. The CFTC has been active in trying to enforce regulations on the crypto sector. Last week it filed and settled charges against bZeroX LLC and its founders Tom Bean and Kyle Kistner for illegally offering "leveraged and margined retail commodity transactions in digital assets, engaging in activities only registered futures commission merchants (FCM) can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs." 

Meanwhile in the UK, the “merge” which hit the value of Bitcoin and Ethereum when it took place on 15 September may have unintended tax consequences. As noted by Bloomberg, after the merge holders of Ether can choose to lock up, or stake, their coins on the Ethereum blockchain to help validate transactions, and that will also earn rising yields. This therefore may push staking  into the mainstream. Although the UK has already issued guidelines on how staking should be treated for tax purposes, it does put the onus on investors to figure out what they might have to pay.

Key data to look out for this coming week 

In Europe: 
Friday: German retail sales. German and Italian unemployment rate data, Eurozone Inflation (HICP) data, Eurozone unemployment rate data, a speech by ECB board member Frank Elderson, and a speech by ECB governing board member Isabel Schnabel.
Monday: Eurogroup meeting, Spanish and French S&P Global Manufacturing PMI, Italian S&P Global Manufacturing PMI, German S&P Global/BME Manufacturing PMI, Eurozone S&P Global Manufacturing PMI.
Tuesday: European Union EcoFin meeting and Eurozone PPI data.
Wednesday: Spanish, Italian and French S&P Global Services PMI, French S&P Global Composite PMI, German S&P Global/BME Composite and Services PMIs, Eurozone S&P Global Composite and Services PMIs.
Thursday: German Factory Orders data, Eurozone Retail sales data, and ECB Monetary Policy Meeting Accounts.

In the UK: 
Friday: GDP.  
Monday: S&P Global/CIPS Manufacturing PMI.
Wednesday: S&P Global/CIPS Composite and Services PMIs.

In the US: 
Friday: Core personal consumption expenditure price index data, Personal income, Personal spending, Chicago Purchasing Managers’ Index, Michigan Consumer Sentiment Index, a speech by Fed Governor Lael Brainard,  a speech by Fed Governor Michelle Bowman, and a speech by the President of the Federal Reserve Bank of New York John Williams.
Monday: S&P Global Manufacturing PMI, ISM Manufacturing Employment Index, ISM Manufacturing New Orders Index, ISM Manufacturing PMI, ISM Manufacturing Prices Paid., 
Tuesday: Factory Orders, JOLTS job openings data, and a speech by the PResident of the Federal Reserve BAnk of New York John Williams. 
Wednesday: ADP Employment Change, S&P Global Composite and Services PMIs, ISM Services Employment Index, ISM New Services Orders Index, ISM Services PMI, ISM Services Prices Paid. 
Thursday: Initial and Continuing jobless claims.

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