Equities | Europe | FX | Global | Monetary Policy & Inflation
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Markets were bid across DM equities and rates last week, albeit with underperformance in European periphery assets. Meanwhile, Chinese equities moved lower, while pro-cyclical commodities saw some recovery (they are expected to be volatile ahead). Meanwhile, weakness resumed for agris. USD weakened on the week, particularly vs JPY.
Major themes included: continued underperformance of growth indicators, with Eurozone PMIs dropping <50 in manufacturing and US Philly Fed survey undershooting all expectations; Italy’s government collapsed, with new elections being set for 25 September; the ECB surprised markets with a 50bp hike, but under-delivered on its spread-tightening, Transmission Protection Instrument (TPI); and Nord Stream gas flow from Russia to Germany resumed at continued reduced volumes, while the EU announced plans to coordinate a 15% reduction in gas demand until next Spring.
DM rates bull-flattened, with strong widening in BTP/Bund spreads across the curve. Italian equities also underperformed. Equity gains across Europe were led by Real Estate and Tech, while the US saw Consumer Discretionary and Industrials outperforming. Across both geographies telecoms underperformed. Q2 earnings announcements were perhaps not so negative as expected after weak earlier releases.
The Week Ahead
The week ahead will be focused on the Fed, where a 75bp is expected. Dominique is expecting Chair Jerome Powell to attempt to push back on the market’s pricing of cuts in 2023, with likely limited success. She also expects him to provide hints on the next steps in QT. She expects the bond cap to be lifted to $90bn in December, and for MBS sales to start in Q4.
On the data front, Dominique does not attach a strong weight to the negative surprise in services PMIs as the employment component showed strong expansion. She sees growth pessimism reflecting measurement issues. US/China tensions have escalated on the back of House Speaker Nancy Pelosi’s planned trip to Taiwan at the start of August. The trip has sparked a stronger reaction from China than in the past, with some sources suggesting it may provoke a military response.
Elsewhere, the announcement of agreement to release Ukrainian grain exports last Friday from Black Sea ports likely helped suppress wheat prices. However, Russian missile strikes on Odesa’s port soon after put a damper on how effective the regime may be. We sit neutral-to-bullish agri commodities.
In Europe, Italian politics will be critical to watch. Campaigning for the 25 September election will begin imminently. Current polling suggests a centre-right coalition of FdI, Lega and FI could gain majorities in both houses. Right now fundamentals are not particularly pro-Italy, but Henry is cautious that given where spreads are, the risk is probably skewed towards ECB speaker pushback against the widening.
In European data, consensus is split on the MoM EZ CPI move, with a narrow majority favouring a modest decline in July. That would be the first decline in the reading in 12 months and would no doubt gain strong headlines. Given the gas price rise in July, the risks may be to the upside, albeit with some offset from the price of oil and of national policy intervention on prices. The outturn will come in the context of markets pricing relatively little change to ECB terminal rate after last week’s policy decision.
For more in-depth analysis, see Dominique and Henry’s week-ahead preview, and watch Andrew and Dominique discuss the Fed, inflation and important US data for the week.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.