Please find below, a Daily Investment Bulletin received from Brooks Macdonald, this morning – 15/07/2022
What has happened
Risk appetite remained supressed yesterday as bank earnings and recessionary fears combined into another poor day for equity markets. JPMorgan yesterday missed expectations and Morgan Stanley saw investment banking revenue halve compared to the previous year. Q2 earnings will be a key determinant of whether the market concludes that the year-to-date falls adequately compensate for the expected deterioration of margins over the short to medium term.
Federal Reserve
With the US CPI report causing investors to reappraise the near term path for US interest rates, ‘Fed speak’ is being scrutinised to gauge the chances of a 100bp hike. The Fed will enter their communication blackout window on Saturday so yesterday’s comments are one of the last tests of Governor sentiment that the bond market has to work with. Governor Waller yesterday said that the CPI beat earlier in the week justified another 75bp rate hike however he was open to a larger hike if economic data was stronger than expected. President Bullard meanwhile also supported a 75bp hike, with the result that markets reduced their expectations for a 100bp hike. The 2-year US Treasury yield gave back some of its recent rise, trading at 3.11% at the time of writing. US technology stocks were a particular beneficiary of this reduction in rate expectations, managing to secure a small gain yesterday even as the broader US market sold off.
Italy
European political risk returned to the fore yesterday as Prime Minister Mario Draghi attempted to resign after the Five Star Movement refused to back his government in a confidence vote. Draghi said that ‘The loyalty agreement that was the foundation of my government has gone missing.’ With President Mattarella declining the resignation, the Italian political backdrop is uncertain with a fresh round of elections possible. Italy has been facing a large number of economic and political challenges since COVID, as reflected in the spread between German bond yields and Italian yields. Yesterday saw that spread widen to its largest level in over a month.
What does Brooks Macdonald think?
Adding to the concerns of a global slowdown, overnight China released their Q2 GDP data which showed that the economy contracted on a quarter-on-quarter basis. China continues to struggle in applying the zero COVID policy to the latest Omicron led surge and this slowdown may well prompt Beijing to provide further economic support to ensure that the economy does not stall over the summer.
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David Purcell
15th July 2022