Please see below Brooks MacDonald Daily Investment Bulletin, received yesterday afternoon, 03/08/2022:
What has happened
Market movements closely tracked the take-off and landing of Speaker Pelosi’s plane as she travelled to Taiwan amidst strong condemnation from Beijing. With Pelosi’s plane safely landed, US Treasury yields ended sharply higher on the day, reversing Monday’s declines. Against this backdrop US equities struggled, posting modest losses on the day.
Taiwan
The safe landing of Pelosi’s aircraft led to a surge of optimism within bond markets however there are still some economic and political consequences to be fully priced in. China has announced a series of military drills over the coming days in what is seen as one of the strongest shows of force this century. China has also imposed targeted sanctions on Taiwan including exports of natural sand and food imports. The military exercises, and missile tests, are expected to keep both the US and China on edge over the coming days but markets took comfort from the relatively subdued Chinese response.
Corporate earnings
A series of strong earnings results helped market sentiment early on in the trading session yesterday. Uber and Lyft both saw strong earnings as did Maersk that is a beneficiary from the recent supply-chain disruption. Caterpillar, widely seen as a cyclical bellwether, produced downbeat forecasts, citing inflation and supply led constraints. Caterpillar does seem to have a bit of a reputation for downbeat economic forecasts however inflation and supply-side issues are undoubtedly weighing on industrial names. BP meanwhile raised its dividend and increased its buyback programme in response to strong earnings. These earnings have spurred another call for increased windfall taxes however until the Conservative leadership contest is settled, the windfall tax remains on hold.
What does Brooks Macdonald think
Amidst the earnings and geopolitical risks yesterday, a series of Fed speakers also threw cold water on expectations of an imminent pivot in Federal Reserve policy. The movements in both the bond and equity markets were quite remarkable in July given the lack of a clear change in policy from the US central bank. President Bullard said that the US economy could avoid a recession even if the Fed continues to raise rates and President Daly said that the Fed was ‘nowhere near’ complete on tackling inflation. Such words helped the rise in bond yields yesterday even if investors were mainly focused on tracking the path of Pelosi’s flight.
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Cyran Dorman
4th August 2022