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Having left for holidays on August 5th, with the S&P 500 closed for the week at 4,145, not a lot seems to have changed. Monday’s session saw the worst decline for the US stock market in 2 months with the index closing down 2% at 4,138 – just a seven-point difference despite a sharp rally peaking around the middle of the month around the 4,300, where it encountered trend resistance as well as horizontal resistance from the several attempted rallies in May. It’s also pulled back sharply from its 200-day SMA as bears lick their lips again after what’s been a pretty savage bear market rally over the last two months. The breadth and depth has been pretty good in that rally and the fact it pulled back exactly where it ought to have has the bulls content that the bottom is in. Macroeconomic situation still looks dreadful but then the market will always turn well before the streets are no longer running with blood. In truth not a lot has changed on the macro front over the last two weeks or so. Inflation is soaring, energy prices in Europe are soaring and central banks are only going in one direction. US earnings have helped shore up the market but I would tend to say that it’s still not the time to fight the Fed as the macro setup remains so challenging.

 

European stock markets have also pulled back in recent days as the whirlwind of red-hot inflation, a more hawkish central bank narrative and a looming – if not nascent – energy crisis pulling on the nerves of investors everywhere. Last week the Fed gave the market a thorough gut check and made it clear that there would be no pivot – at least no time soon. The US 10yr Treasury yield has risen above 3% for the first time in a month and the dollar has soared. With the Fed driving the market and the macroeconomic unclear, all eyes are on this week’s Jackson Hole symposium. The topic is “Reassessing the Constraints on the Economy and Policy” – the new world order of higher rates, lower unemployment and getting a finger on what it is that is constraining the economy.  

 

The FTSE 100 was little changed on Monday as it tries to cling to the 7,500 handle after a roughly 7% rally over the last month. The pullback looks more constructive than destructive for now, but investors everywhere are hesitant. The DAX has declined around 6% or so in the last week and was off by 2.3% on Monday. This morning, European shares have opened lower again.

 

The US dollar has risen sharply off the 38.2% retracement and the euro has broken down to fresh 20-year lows. EURUSD is making new lows again this morning, just about holding 0.99. GBPUSD also strikes a new two-year low a little above 1.1710. It’s nasty out there. Sterling is not helped by Citigroup’s 18.6% inflation call. Likewise, euro traders are mainly looking at the energy market as we see another jump in European gas prices after Gazprom said it would carry out unscheduled maintenance work on the Nord Stream 1 pipeline. European gas prices now trade around 15 times their average price of the last ten years – Belgian’s PM De Croo says Europe faces 5-10 tough winters…energy policy failure absolut.  

 

Oil prices have been in steady decline since their peak in June but have attempted to rally in the last few sessions. Prices were boosted again as Saudi Arabia’s oil minister bin Salman said late Monday that OPEC could tighten output to correct the recent decline in prices. He’s right to point out that the futures market simply does not reflect how tight the current physical market is. But it’s kind of unusual to answer incredibly tight physical supplies with production cuts…seems odd and in fact it’s a subtle step change for OPEC to refer specifically to stabilising prices and not the ‘market’. Hardly likely to stabilise the market much but the Saudis have long experience. Meanwhile natural gas prices in the US have hit $10, the highest since 2008 as European benchmarks once again soar. 

 

Elsewhere, Japanese factory growth slowed to the lowest in 19 months. European PMIs this morning lay bare the concerns about the economic outlook after the final composite PMI index fell to a 17-month low in July. The German composite output index fell to a 26-month in August, albeit the manufacturing flash PMI reading is a tad better than expected.  The Bundesbank says a German recession is increasingly likely. 

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