Hey everyone, US markets will be closed on Monday for Labor Day however markets are waiting to fully grasp the move in energy and European markets with Russia’s stated objective of closing down Gas Pipelines over the weekend. Get my current take on the markets and what is setting up to be a very interesting month of September.
WEEKLY SOUND BITES:
Major indexes moved lower for the week as investors continued to digest the implications of hawkish messages from Federal Reserve officials. The month of August saw the S&P falling more than 4.2% after a 9.1% gain in July. For Q2 Earnings we see that stocks which fell short of earnings estimates or that issued disappointing earnings guidance were punished much more than those that beat estimates were rewarded. Currently Funds are lower than 90% of the historical readings for relative exposure to the equity markets. Some analysts believe we have yet to see the larger forward reduction in earnings that will be coming with current consensus estimates too optimistic putting the floor of the S&P around 3200 which is 19% lower than the current levels. The current 200 SMA has been declining for 90 consecutive days. This has happened 23 times going back over 92 years. The S&P has dropped an average of 5.8% over the following six months from the 90-day mark. This would put the S&P down to around 3700 price levels.
Friday’s August jobs report from the Department of Labor showed that the economy added 315,000 jobs last month, a number seen as solid though down from a revised 526,000 in July. The unemployment rate rose to 3.7% from 3.5% in July as the labor force participation rate increased. This “goldilocks’ Job Numbers (not too high or too low) helped propel price action higher until mid-day reports showed Russia doing a complete shut down the Nord Stream I Gas pipeline. This quickly sent shock waves thru the markets driving price action much lower with the S&P doing over a 100-point intraday reversal and the Dow reversing more than 850 points as we headed into a long US Holiday weekend.
The evidence of continued tightness in the labor market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007. And the only real way to reduce inflation is to raise the unemployment rate higher. Bond traders have come to expect that the Fed would rush to cut rates and loosen monetary policy any time the economy showed a hint of weakening, which is often referred to as the “Fed put.” Fed Chair “Boom Boom” Powell seemed to be putting that assumption to rest during his very short Jackson Hole WY 8-minute speech. Over the long-term, the price of the stock will ultimately reflect a company’s performance and its ability to grow earnings, which may be impacted by the Fed near term, but not determined by it.
Shares in Europe fell sharply on fears that central banks could tighten monetary policy aggressively for an extended period while worries Russia will stop natural gas supplies to Europe weighed on sentiment. Eurozone money markets are now pricing in a roughly 80% chance of an exceptionally large 75 bps rate hike by the ECB at its next meeting. Inflation in the euro area accelerated more than expected to a record 9.1% in August, up from 8.9% in July. Surging energy and food prices were the primary drivers. And in the UK, the pound posted its steepest monthly drop versus the U.S. dollar since October 2016. The pound fell more than 4% in August to USD 1.16. The pound also declined almost 3% relative to the euro.
And in Japan, the Yen breached the 140 level against the U.S. dollar for the first time since 1998 due mainly to the diverging paths of their Central Bank’s policies with those of the US. Japan is still pumping money into their markets with negative interest rates while the US is raising rates and cutting debt.
China said it would implement a landmark audit agreement it struck with the U.S. last month. Both countries signed a preliminary deal on August 26 that would allow U.S. accounting officials to review the audit papers of U.S.-listed Chinese companies, resolving a yearslong dispute that threatened to kick off about 200 Chinese companies from U.S. exchanges. However, China’s economy is in a notable slump, with data in everything from factory activity, consumer spending, and housing all in decline. The worst heat wave in 60+ years, a drought, and ongoing Covid-19 restrictions have all served as stiff headwinds to China’s economic growth. The heat wave and drought have led to electricity shortages which have curtailed manufacturing activity, with the purchasing managers index still below 50. Property developers in China are also reporting a plunge in activity, with sales off more than 30% compared to August 2021.
Enjoy this Week’s Market Round-Up:
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