Market Update – 24th August 2022.

24th August 2022

Global equity markets declined at the start of the week with the market placing bets on whether there has been a Federal Reserve pivot – that is if the U.S. central bank plans to slow its rate of hiking interest rates. After the release of the Federal Open Market Committee minutes last week, many in the market have taken Fed Chair Jerome Powell’s statement regarding slowing rate hikes to mean that the Fed would be more dovish going forward.

Whilst rates are likely to rise, we believe that increases won’t be as aggressive as markets have priced in. Powell has a chance to reset market expectations as he is due to address an annual global central banking conference in Jackson Hole on Friday.

The S&P 500 started the week with a slump. Financials were hit after it was announced that big banks in the US will be collectively fined more than $1 billion for using unapproved messaging tools such as personal emails and WhatsApp. Banks stand to benefit from gradually increasing rates. Profitability for banks is strong, a compression here could represent a buying opportunity for a sector that has been hampered since the financial crisis.

Russian natural gas supplies are down around 75% YoY with export company Gazprom last week announcing that the Nord Stream 1 pipeline would need to be closed for 3 days for unscheduled maintenance. As a result gas prices spiked this week, hitting record levels: markets panicked on the news, concerned that the pipeline may not reopen, or its reopening could be used as a bargaining tool to reduce sanctions.

As we have mentioned previously, current energy concerns are founded on distribution issues so there is the potential for long term easing as there are no global supply issues.

On Tuesday this week, we saw the release of PMI data from the UK, US & Eurozone. The Purchasing Managers’ Index is based on a monthly survey of supply chain managers and reflects the direction of economic trends in the manufacturing and services sectors. Readings below 50 usual signify contraction.

UK Composite PMI came in just under market expectations at 50.9. Optimism came from the services industry (an industry that includes travel and tourism). Companies expressed slightly stronger confidence compared to the previous month as COVID-19 recovery increased projected demand. Whilst survey results were mixed for the Euro area, the US saw a decline across manufacturing and services, thus indicating a second successive monthly decrease in total business activity. On a positive note, cost of supplies eased for the third month in a row – a sign inflation pressure may be easing.

Still to come this week we have US Durable Goods Orders and the Jackson Hole symposium.

Kate Mimnagh, Portfolio Economist.