Find anything about our products, search our faqs, and more.
Type your query in the search above and press enter to see the results
Try typing "Card activation"
Chief Investment Officer's team, 08.08.2022
US stocks ended the week mixed following a very strong jobs report that rekindled expectations of more tightening to come, with the S&P 500 recording modest gains and the Dow Jones unchanged. Equities continued to be supported by above-consensus earnings, while yields closed higher in the five days through Friday, as the message coming from the labor market and hawkish declarations by Fed officials outweighed the rising US-China tensions sparked by the Taiwan visit of Nancy Pelosi. On the other side of the pond equities in Europe and the UK eked out only modest gains, as economic momentum worsened significantly in the common area and the BOE raised rates by 50 basis points, forecasting that inflation remains “very elevated” and a recession could start in winter. Mainland China equities closed slightly negative for the week with economic woes coming back to the fore. Business surveys were underwhelming and the real estate crisis deepened.
The US labor release hogged the limelight, and rightly so, showing strength across the board, with payrolls numbers, wage growth and employment all above expectations. The economy saw the addition of 528,000 non-farm payrolls in July, while the steady-employment payrolls level is around 100,000 per month. No wonder that San Francisco Fed Mary Daly said that the Fed is ‘far from done yet’.
The rift between the two global superpowers is widening as the PLA encircled the island of Taiwan and ran unprecedented live military drills after Nancy Pelosi left Taiwan. There is no visibility as to when tensions could subside, with Western leaders possibly emboldened to fly to Taiwan and the Chinese feeling compelled to escalate. Stay safe.
We continue to have little confidence in the fast and furious rally that has followed the July Fed meeting. Both the belief in the Fed pivot, that is in a milder monetary cycle now that a supposedly ‘neutral rate’ has been reached, as well as concerns about an impending recession, should have been crushed by the Friday’s blowout jobs report. Job openings are too plentiful for the economy to be facing a hard landing, and the Fed has a ‘whatever it takes’ approach to taming inflation at multi-decade highs with a booming labor market, hence the tightening will continue. Investors seem to have cherry-picked from Powell’s words what could please animal spirits the most. Yes, the Fed will be ‘data-dependent’, but the Fed chair in the Q&A session two weeks ago also mentioned that the natural rate of unemployment has moved higher. Outside of the economic jargon this means that there is more need for tightening to curb labor market strength. Indeed, following the payrolls release equities stalled, treasuries pulled back and the pricing of future policy rates changed to signal a high probability of a 75-basis-point hike in September and a peak rate in December at 4%. This seems still too benign, and some analysts are now leaning towards a 5% terminal rate, a far cry from market expectations. The most likely scenario for this year seems to remain that of an ongoing slowdown, with risk assets stuck in a range and the next big risk event being, rather than a recession, the mid-term elections.
High yielding bonds have rebounded hard alongside equities in the past two weeks, yet risks remain round the corner. If history is any guide, buying the weaker credits when a tightening cycle is in full swing, as now indicated by the deep inversion of a treasury yield curve, has rarely been a good idea. The same holds for EM debt, as US rates volatility is still at peak levels, and that volatility in the past abated only when policy rates inflected lower. In summary, with equity and high-yielding credit gains capped, sticking with high-quality bonds still seems a winning strategy, although capital gains may well be behind us and one must be happy with coupon clipping only. As for gold, it is hard to envisage more than a short-lived rally for now, considering the outlook for US policy rates.
Peaking and then fast receding inflation would be a game changer for risk assets, although for now it seems a rather remote possibility. Unless we hold the view that money supply only has played an outsized role in stoking price pressures. Liquidity momentum has been tumbling following the fiscal drag from dwindling subsidies and the Fed’s tightening. Will inflation follow through and tumble as well? Investors will be looking forward to next week’s inflation release, as well as the August one, before the next Fed meeting to be held on 20 - 21 September.
Fixed Income Update
US treasury yields surged on Friday on a stronger than expected jobs report, as the unemployment rate dropped to 3.5% at a five-decade low. The 2yr yield rose 22 basis points and closed at 3.26%, while the 10yr rose by 18 basis points. The degree of treasury curve inversion remains high with 2s10s hitting 40bps, close to the degree of inversion last seen in 2000 at 47bps. The strong labor market reduces the outlook for Fed funds to decline next year, as weakening gauges of business activity, housing, and consumer confidence could initially suggest. Fed officials also signaled that they don’t believe the economy is in recession. Fed Governor Michelle Bowman said she supports the Central bank’s recent 75bps rate hike and believes they should continue until inflation is subdued. Hence, the market is predicting a third consecutive 75bps rate hike in September. Next week’s inflation data remains crucial, with volatility expected to remain elevated in the treasury market.
Last week, the BoE also joined the jumbo hike clubs by raising rates by 50 bps, the largest hike in 27 years, with the majority MPC members voted for a 50bps hike. The BoE is now forecasting a recession starting in Q4FY2022 through to 2024. The bank expects its balance sheet to shrink by around GBP80bn in the first year, with GBP35bn of redemptions and GBP10bn per quarter of gilt sales across the curve. Governor Andrew Bailey reiterated his concerns about the tight labor market resulting in higher wages, consequently leading to higher inflation. On the path ahead, the MPC retained both the “scale, pace and timing” and “act forcefully” language. Markets expect one more 50bp hike in September. Separately, on Friday the Reserve Bank of India also raised the repurchase rate by 50bp, taking it to 5.4% with a hawkish tone.
Since mid-July, the HY-IG spread gap has compressed by about 90bp, after trading near historical highs. In the US, the HY rally can be attributed to technical factors, a very low supply in the HY primary market alongside strong inflows (cumulative $7.8 billion net inflows in the past two weeks). In Europe, the HY-IG spread gap is not expected compress further – Firstly, the gap is still at the low end of its post-global financial crisis range, indicating that there is still room for decompression. Secondly, the outlook for tighter monetary policy and a worsening growth-inflation mix would be supportive of high-quality bonds versus HY. Lastly, the end of ECB net purchases should drive risk aversion and continue to attract investments in the safer segments of the credit market. In the MENA region, HY sovereigns like Bahrain and Oman have continued to rally, and offers in both sukuks markets almost completely dried. If the market’s focus on recession risk intensifies, then HY could again underperform IG.
A positive week for global equities, maintaining levels, post the 7% upswing seen in July. The Nasdaq had a good week, as well as the GCC (in spite of falling oil prices), and India. Year to date global equities are down 14% after having seen a trough of 22% on 17th June. Many stocks that had lagged the broader market in H1 have staged a rebound, aided by earnings results and retail buying. Energy however, is the only sector with positive returns YTD and the UK, LATAM and GCC are the only regions in the green. In H2, we have seen a tech rebound as Treasury yields fell, however the strong US jobs report on Friday is causing concerns about the outlook or rising yields. We retain our conviction on select tech sectors which participate in global trends such as the cloud, ecommerce, EV’s, the use of big data and AI and semis.
Recent data releases and corporate-earnings reports have flashed mixed signals about the economy’s trajectory and whether a recession is on the horizon. The jobs report however removes fears of any imminent recession as the two key features of every US recession, rising unemployment and falling economic output have the first part holding up, though GDP has contracted for two straight quarters. Equity markets continue to be driven by inflation concerns, the war in Ukraine and supply chain constraints. Rising rates, raising debt-servicing costs and leading to demand destruction, are also at the forefront of investor minds.
US markets have remained resilient on a strong earnings season and growing belief the Fed can tame inflation. Valuations remain reasonable even after the recent rally and the forward 12-month P/E ratio for the S&P 500 is 17.5X. In spite of a planned 1% buyback tax, S&P 500 buyback announcements are at $541B YTD, well-above the 2021 pace. Q2 Earnings have seen 87% S&P 500 companies reporting, with 63% beating revenue forecasts and 75% profit projections. Y/Y revenue growth is tracking +13.6% and earnings +6.7%. the biggest contributor to the gains has been the energy sector. Looking ahead, analysts expect earnings growth of 5.8% for Q3 2022 and 6.1% for Q4 2022 and for CY 2022, 8.9%. A positive surprise has been the net profit margin for the S&P 500 for Q2 2022 at 12.3%, above the 5-year average of 11.2%, equal to the previous quarter’s net profit margin of 12.3%, and just below the year-ago net profit margin of 13.1%.
Asian equities ended the week higher, taking geopolitical tensions between China and the U.S. in their stride following Nancy Pelosi Taiwan visit. On a tactical level we have removed our China OW and added to the India OW. Overall, positioning remains unchanged. We are Neutral Developed Market equities with a preference for the UK and the US and a small OW on Emerging Market equities with a preference for India and the UAE. Economic concerns around China have increased with continuing COVID-induced lockdowns and although an economic rebound in China looks underway according to government and private sector data, the stock market may remain volatile as the US SEC continues to add to China ADR’s for their potential delisting.
Written By:Maurice Gravier Chief Investment Officer, [email protected]
Emirates NBD Bank PJSC (“Emirates NBD”) is licensed and regulated by the UAE Central Bank and this website aims at providing Internet users with information concerning Emirates NBD Private Banking, its products and activities. Persons having access to information made available by Emirates NBD on this website accept the following rules:
Emirates NBD uses reasonable efforts to obtain information from sources which it believes to be reliable, however Emirates NBD makes no representation that the information or opinions contained in publications on this website are accurate, reliable or complete. Published information may include data/information from stock exchanges and other sources from around the world and Emirates NBD does not guarantee the sequence, accuracy, completeness, or timeliness of information contained on this website provided thereto by unaffiliated third parties. Anyone proposing to rely on or use the information contained on this website should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts. Further, references to any financial instrument or investment product are not intended to imply that an actual trading market exists for such instrument or product. Emirates NBD is not acting in the capacity of a fiduciary or financial advisor. Any publications on this website are provided for informational purposes only and are not intended for trading purposes. Data/information provided herein is intended to serve for illustrative purposes and is not designed to initiate or conclude any transaction. The information available on this website is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. This website and anything contained herein, is provided "as is" and "as available," and that Emirates NBD makes no warranty of any kind, express or implied, as to this website, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.
The provision of certain data/information on this website is subject to the terms and conditions of other agreements to which Emirates NBD is a party. Emirates NBD reserves the right to make changes and additions to the information provided at any time without prior notice. The information may be modified or removed without prior notice. No buy or sell orders submitted via the internet or email will be accepted. In addition, the data/information contained on this website is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to the determination of whether a particular investment activity is advisable.
Information contained on this website is believed by Emirates NBD to be accurate and true, in all material respects. Emirates NBD accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained on this website. Further Emirates NBD accepts no liability for the information and opinions published on the website and is under no obligation to remove outdated information from its website or to mark it clearly as such. The information given on this website may not be distributed or forwarded in whole or in part. Accordingly, anything to the contrary herein set forth notwithstanding, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from the information available on this website including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. or (c) under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of the information on this website, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business. Emirates NBD expressly accepts no liability for losses or damages of any kind arising from using or accessing this website or links to third-party websites or from viewing information on any of its web pages. Furthermore, Emirates NBD accepts no liability for any unauthorized manipulation of users IT systems. Emirates NBD expressly draws user’s attention to the risk of viruses and the threat of hacker attacks
Third Party Website:
Users may be aware that Emirates NBD has no control whatsoever over third-party websites linked to or from this website and therefore accepts no liability for the content of such websites being correct, complete and legally valid for the products and services offered on such websites. Emirates NBD’s express written permission must always be sought before including a link to this website on a third-party website.
None of the information on this website in any way constitutes a solicitation, offer, opinion, or recommendation by Emirates NBD to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services regarding the profitability or suitability of any security or investment.
The information contained on this website does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication on the website are about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Undue reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
Risk: In addition, before entering into any transaction, the risks should be fully understood and a determination made as to whether a transaction is appropriate given the person’s investment objectives, financial and operational resources, experiences and other relevant circumstances. The obligations relating to a particular transaction (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk should be known as well as any regulatory requirements and restrictions applicable thereto. Data included on this website may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records.
Investment in financial instruments involves risks and returns may vary. Before making such an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment.
The information on this website has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and all present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties and you acknowledge that you have no ownership rights in and to any of such items. Except as specifically permitted in writing, the information provided in this website shall not be copied or make any use of any information on this website or any portion of the intellectual property rights connected with this website, or the names of any individual participant in, or contributor to, the content of this website, or any variations or derivatives thereof, for any purpose. Further you shall not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you or, except as otherwise provided with Emirates NBD’s prior written consent,
The information on this website solely for non-commercial use and benefit and the use of this information is not intended for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. Information contained in this website shall not be used, transferred, distributed, reproduced, published, displayed, modified, create derivative works from any data contained on this website or disposed of in any manner that could compete with the business interests of Emirates NBD. Any part of this website may not be offered for sale or distribute it over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet without the prior written consent of Emirates NBD. The information contained on this website may not be used to construct a database of any kind. The data on this website shall not be used in any way to improve the quality of any data sold or contributed by you to any third party.
In accessing this website, you acknowledge and agree that there are risks associated with investment activities. Moreover, you agree that your use of this publication is at your sole risk and acknowledge that the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described on this website and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with you.
Emirates NBD Bank (P.J.S.C.) is licensed by the Securities & Commodities Authority and subject to regulation, supervision and control of the Authority.
Head Office : Baniyas Road, Deira, PO Box 777, Dubai, UAE
Powell’s words boost animal spirits
The sunny side of volatility
A narrow corridor for soft-landing
Heated by the sunshine of a vibrant recovery, the magic liquidity is evaporating, and turning into fog for investors. While growth remains robust, markets may not be ready for the new uncertainties around central banks, inflation and interest rates, to name a few. We are getting prepared to navigate tactically, in a year of ‘low visibility ahead’.Know More
How was your website experience today?
Subscribe and stay updated!
Get exclusive deals, latest promotions and important information
All this and more in the Emirates NBD newsletter
You are leaving the Emirates NBD Website
You will now be redirected to an external website to view this content. Emirates NBD or any of its subsidiaries does not bear liability/responsibility for any other information published by the website owner or publisher.
You will be redirected in 5 Seconds