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The world today is kind of wild. August 24th: California bans sale of new gasoline-powered cars by 2035. August 30th: California asks people to avoid charging electric vehicles due to electricity shortages. Ok, so it might not be as simple as all that – the temporary shortage of power is down mainly to soaring temperatures, which increase demand and have depleted hydro reserves. But it smacks of the dichotomy we see in failed energy policy; edicts to replace fossil fuels with green power but without ensuring that the grid is ready for it. 

 

European stock markets are starting September in familiar fashion – down. August was rough and the new month holds precious little hope for the bulls – only technical reversals in the longer-term downtrend. However, it’s becoming ever clearer that central banks are taking a harder line on inflation risks and are prepared to cause pain in order to bring it down. US futures are weaker again with E-minis back to 3,930, an area last traded at the end of July.  

 

News this morning is not terribly positive: China’s Chengdu 21m population is going into lockdown amid mass Covid testing…supply chains etc. New Covid curbs are weighing on the luxury sector in particular this morning. Meanwhile China’s Caixin manufacturing PMI showed the sector shrank last month due to lockdowns and an energy crunch that seems to be no less severe than that in Europe, where Germany is enforcing rationing and businesses are halting production due to rising prices; something that the economy minister Robert Habeck described as ‘alarming’. Manufacturing activity in Taiwan and South Korea also fell sharply as Asian businesses feel the effect of the Fed’s tightening, whilst Japan’s growth slowed.  

 

Wall Street closed down for a fourth straight day, putting the seal on a pretty miserable August for the major indices. The Dow Jones, S&P 500 and Nasdaq all declined by more than four percent for the month. Nevertheless, the S&P 500 is still almost 9% above its mid-June lows, whilst the Dow is over 6% higher. European indices were down a similar margin in August with the DAX and CAC both falling by more than four percent for the month, whilst the FTSE 100 held up better, falling by 1.7% for the month, bolstered by a weaker pound, which had its worst month since 2016.  

 

Chipmakers: Shares in Nvidia and other chipmakers fell after the company said the US is restricting sales of chips to China. The company is applying for a licence but it is unclear whether it will be able to continue to sell in China. The new rules could impact up to $400m in sales in China this quarter, Nvidia said in a filing. Shares fell more than 6.5% in after-hours trading, whilst AMD stock declined by 3.7%. 

 

Elsewhere, Snap shares jumped almost 9% in volatile trade, having been down sharply in the pre-market, after the company announced a restructuring designed to save $500m a year. Investors seemed to like the 8% revenue growth despite it being well below the 25% guided previously. Despite the pop, Snap is down 76% after a pretty horrible second quarter results in July. 

 

No let up for the pound: Sterling had a rough month and GBPUSD slipped to a 1.15 handle overnight as the pressure remains on the currency. Fears about soaring inflation and a recession are not being helped by the kind of promises being made by Tory leadership frontrunner Liz Truss. (We hang the petty thieves and appoint the great ones to public office – Aesop). Meanwhile, UK consumer confidence has unsurprisingly fallen to its lowest level since November 2020 in the biggest monthly decline since April of that year, according to a Bank of America survey. 

 

There was more hawkishness from central bankers – markets are getting a little more used to the reality now. The Fed’s Mester was specific about it, too, saying the Fed would need to raise rates to ‘above 4%’ by early next year and hold it there. Meanwhile the ECB’s hawk from Austria Holzmann said the minimum the central bank ought to raise rates by next week is 50 bps and 75 bps should be debated. Several banks have upped their forecasts in the wake of yesterday’s hot CPI print for the Euro area, which showed inflation rose to 9.1%. Bund yields keep rising – the old mantra to never the sell the bund is dead – with the 2yr up at 1.25%, a big leap from around 0.87% last week. The 10yr has jumped from 1.4% to 1.6% as markets price in a weaker economy and higher policy rates in the Eurozone. Italy’s 10yr yield is approaching 4%. A 75bps hike by the ECB next week is now priced. EURUSD is holding onto parity for the time being but downside risks are clearly evident. 

 

The divergence between crude pricing and the physical situation continues. WTI sank to $88 and is down 9% since Tuesday even as the EIA reported a larger-than-expected draw on inventories. US crude stocks declined by more than 3m barrels last week, whilst gasoline inventories also fell for a fourth week in a row. US SPR stocks are down to their lowest since December 1984. OPEC+ meets on Monday and a supply cut is on the table.

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