Chart Of The Week   September 01 2022

August In Review

August In Review

The broad-based selloff returned in August.

Global and US fixed income markets – which led all other major financial assets in generating abnormal gains in July – posted the lowest z-scores in August as investors’ attention shifted from recession fears to Fed hawkishness.

Meanwhile, the performance of equity markets in August is a tale of two halves. Most major global equity indices rallied in the first two weeks of the month. Evidence of easing price pressures coupled with signs of deteriorating demand conditions encouraged investors to bet that the Fed will soon be forced to abandon its hawkish stance. However, the rally reversed as it became increasingly clear that the Fed remains committed to bringing inflation back down to target.

Stimulus announcements from China fell short of market expectations and are not sufficient to boost domestic economic conditions. As such, a bottom in Chinese equities remains elusive and industrial metal prices continue to face downward pressure. The poor outlook in China (and the rest of the world) coupled with the energy crisis, weak euro, expanding liquidity risk, and structurally poor profitability are weighing on Eurozone stocks. Our European Investment Strategists have argued that a peak in natgas prices and activation of the TPI are prerequisites for a sustainable outperformance of European equities.

On the energy front, while natgas prices in Europe ended the month higher, prices of other commodities including crude oil moved lower. Our Commodity and Energy strategists expect bullish supply risks in oil markets to win the tug of war with the bearish demand outlook.

Global growth headwinds and the Fed’s hawkish policy stance continue to support the greenback – which is the only financial asset we track that posted positive abnormal returns in August. The macro backdrop could continue to buoy the dollar over the near term even though it is now richly valued. As a corollary EM currencies and stocks will likely underperform.