Please see today’s Brooks Macdonald Daily Investment Bulletin received earlier this morning (16/08/2022):
What has happened
A gloomier economic mood has impacted sovereign bond yields this week with yields falling in both the US and Europe. Against this lower yield backdrop, and despite the poorer economic data, equities rose yesterday in both the US and Europe, building on previous gains.
Economic data
Early on Monday the release of China’s July economic data disappointed the market, showing less momentum than investors had hoped. Industrial production and retail sales both expanded, but by less than expected, and this catalysed another central bank rate cut to help support the economy and financial markets. Over in the US, the Empire State manufacturing survey for August also showed weakness but instead of a positive reading the gauge plunged into negative territory for its worst reading since the financial crisis. The Empire State survey measures business activity in New York State with new orders and shipments both plummeting. Prices paid did fall, and given the fall in new orders, price cutting and discounts are likely to be needed to reduce inventories.
Energy
With lower prices paid set to provide some US inflation relief over the coming months, energy remains a key swing variable. At a headline level, oil prices continue their retreat with WTI below $90 a barrel and Brent falling to levels seen before Russia’s invasion of Ukraine. A fall in demand due to a possible recession is the larger story here however recent moves will also be impacted by the possible return of Iran to global oil supply. The latest developments on the Iran nuclear deal appear to show progress and negotiations between Iran and the EU appear to be gathering momentum. European energy prices remain a standout with prices continuing to rise as heatwaves created issues with fuel transportation and air-conditioning increased energy demand. Should US energy prices continue to decouple from European prices, there could be a very different set of paths for the two economic blocs.
What does Brooks Macdonald think
Financial markets, having been emboldened by the recent weaker-than-expected inflation releases have had a far more risk-on tone in recent weeks. The strong US jobs report also helped sentiment as it raised the prospect that inflation could slow sufficiently to allow central banks to engineer a soft landing from a strong economic starting point. The US jobs report appears to be an exception for the time being however and the weight of poorer economic data is playing through into the bond markets and driving outperformance of growth equity sectors.
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Carl Mitchell – Dip PFS
Independent Financial Adviser
16/08/2022