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Week in Review: 14-18 August 2023

Summary

 

China’s industrial production only grew 3.7% year-on-year compared to the expected 4.4%, while retail sales posted an even bigger miss, coming in 2% lower than forecasts at 2.5%. What's more is that less than an hour before the release of the July data, China's central bank cut a key interest rate by 15bps to 2.50%, marking the biggest cut in more than three years. But more alarming is the slump in the real estate sector, especially as China’s largest private property developer Country Garden missed almost $21mn in interest payments and suspended trading in at least 10 of its mainland bonds, suggesting the firm is on the brink of default. These are painful days in China.

 

Retail sales in the US were up 0.7% month-over-month in July of 2023, beating market forecasts of a 0.4% increase. Consumer spending remains strong despite high prices and borrowing costs. Sales in July likely got a boost from Amazon's Prime Day. Sales at nonstore retailers recorded the biggest increase (1.9%), followed by sporting goods, hobby, musical instrument and books (1.5%). By the contrary, Retail sales in the United Kingdom dropped by 1.2% from the previous month in July 2023 - a sign that the UK consumers are not as healthy as in the US.


The consumer price inflation rate in the Euro Area was confirmed at 5.3% in July 2023, the lowest since January 2022 mainly due to a further decline in energy prices (-6.1% vs -5.6%). Meanwhile, core inflation rate which excludes prices for energy, food, alcohol & tobacco was unchanged at 5.5% and is now higher than the headline rate for the first time since 2021. Compared to June, the CPI in the Euro Area declined 0.1%. The ECB targets inflation at 2%.


Regarding the financial markets, for the week, the main stock market indices are down, with the NASDAQ 100 losing 2.2 %, the S&P500 down 2.1%, and the RUSSEL 2000 down 3.4%. Gold lost 1.3%, and silver is essentially unchanged. The barrel of WTI dropped 2% and seems like it's going to continue around the 81$/bbl in the near future. Bitcoin suffered a major drop of 10.6% and is now around ~26200 USD.

The relative strength of the US dollar rised 0.6%, and bond yields went up again on the long end (4.26% for the 10-year and 4.38% for the 30-year US bonds). The US bond yield curve is peaking at 5.49% in 6 months from now. 

Sources:

https://tradingeconomics.com

https://www.linkedin.com/feed/update/urn:li:activity:7097139612279562240

 

Comment

 

We continue observing a general pullback in the stock markets, coming from overbought conditions. Looking at liquidity in the markets (national financial conditions index, for example), there seems to be no additional tightness - we had the loosening of financial conditions since last March. 

Despite a considerable amount of funds going into the US bond market, it is our view that the equities should not suffer much more in the near future, worst case scenario another 5-6% downdraft in the next few weeks. Afterwards there could be another up move during the next 2 to 3 months until we understand the effects of monetary policy on economic slowdown (earnings degradation, bankruptcy risks, etc...).

If declines in equities are more pronounced than 6% in the near future, then important technical supports have been lost and bigger down moves might be ahead - we would call for extra precaution if this happens.

Despite the degradation in leading economic indicators, it is too soon to declare a recession. The perception of the majority of market participants is that the risk of recession is low. We are keeping our eyes open to what's happening and alert to signs of extra instability that may appear at any moment in the banking system or bond market.

If you are on the conservative side, bonds look quite attractive due to the higher yields. Equities need to be evaluated on a case by case basis (stock picking) and it is our opinion that the overall indices and blue chip tech stocks are not looking cheap at all. Oh, and don't forget about physical assets or commodities, because they hold real value and can also be a hedge in your portfolio


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