For large parts of August, investor risk appetite was relatively muted as players stayed out of the market, waiting to hear what US Fed Chair Jerome Powell had to say on 26 August at Jackson Hole. The hawks won there as Powell warned of the “pain” required to fight inflation, with a continuation of “forceful” rate rises. These were aggressive comments that immediately turned equity markets red for the rest of the month.
Unfortunately, there was no let-up in the Russia-Ukraine war, although several grain ships were allowed out of Odesa. Worryingly, after six months, this war has become white noise to many parts of the world and according to various reports there were no new pledges of weapons in July, although this changed in August, particularly from the US. It was Ukraine who appeared to have the upper hand this month, with increased Ukraine activity in Russia held territory and the start of an offensive to retake the Kherson region; but back in July it had been Russia pushing forward. What is clear, this has become a grinding stalemate, with neither side giving up much ground in the run up to autumn and winter, which is only going to add to the pressure on an unflinching, or perhaps increasingly desperate, President Putin and that is a concern for all of us.
From a European perspective, the result is a countdown to a very expensive winter, possibly a new winter of discontent, with Russia controlling gas prices and supply, and Europe still far too reliant on Eastern gas. In the UK, domestic North Sea gas production has increased 26% in the first half of the year as new fields came on line and planned shutdowns were put on hold, but these are only really sticking plaster solutions, with the boss of Shell saying it will still take several winters to right this ship and we still need to get out of this current predicament.
The other geopolitical hotspot is Taiwan, which has been bubbling away for years, but only became visibly apparent to the rest of the world last month after Nancy Pelosi’s visit riled China, now dubbed the ‘Pelosi effect’. What it has also raised are real concerns about the global semi-conductor industry’s reliance on Taiwan, with Boston Consulting Group estimating that it is responsible for manufacturing around 92% of all advanced semi-conductors.
The overall lack of confidence is evident in the IPO market this year, with US listings falling 95% compared to the same period last year. Furthermore, commentators are not talking up the prospects for the second half, with an uptick only likely to be seen in 2023 at the very earliest. Looking at PMIs and the numbers are again depressed, although in the UK there was some signs of expansion, with the S&P/ Cips UK composite PMI coming in at 50.9 in August, above 50.0 but down from 52.1 in July; this figure does however mask manufacturing stagnation, which came in at 46.0 in August. Eurozone PMI dropped to 49.2.
With commodities still under pressure, supply chains disrupted and confidence low, the inflation numbers and forecasts are only getting bleaker. In the UK, inflation is at 10.1% as food prices hit a 40 year high, with Citi projecting that it could hit 18.6% and Goldman following suit a few days later with a figure of 22%. In Europe, eurozone inflation is at a record 9.1%, with German producer prices up 37% year-on-year and inflation at its worst for 40 years. In the US, inflation surprisingly fell in July, but is only expected to get worse. All in all, global inflation figures make for miserable reading.
The market is now readying itself for an aggressive 75bps rate rise in the US for September, having initially priced in 50bps. There is also pressure on the ECB to accelerate their plans to raise rates. While in the UK, markets are looking at UK interest rates hitting 4% in May of next year, although some of the more hawkish commentators have suggested that this figure should be much higher. Certainly, from what we see, hedge funds generally appear to be taking a hawkish route and shorting markets.
Oil prices fell in August on recessionary and slowdown concerns. This was, in fact, the third monthly fall in prices, with Brent dropping 12.3% during the month to close the month at $96.49 a barrel. But it was European gas prices that have been really ‘weaponised’ by Russia, hitting highs on ‘maintenance’ pressures and concerns about a shutdown on 31 August of the Nord Stream 1 pipeline. During the month, Dutch TTF, the European benchmark for natural gas trading, touched €343 per megawatt hour, yet another unwanted record during this uncertain period. These markets were being driven by headlines and by the end of the month prices were back down over 30%, even with the shutdown, for October ‘22 TTF futures.
Equity markets were generally down the month, with most of the movement in the latter stages following Jackson Hole jitters. The S&P was down 4% and the Nasdaq Almost 4.5%, registering their biggest August declines since 2015. The FTSE 100 held up reasonably well, but ultimately was down 1.7% and the Dax down almost 5%. An outlier was the Nikkei 225 that closed the month up 0.4%.
In currencies, August was all about the strengthening USD against the EUR and GBP as markets prepared for global recession and aggressive Fed hikes. The EUR in particular was walloped by the rising price of gas and throughout the month as investors increased their bets against the currency, with net shorts at their highest since the start of the pandemic. While GBP fell almost 5% against the USD, its worst month since the Brexit referendum.
What had appeared to be a better month for crypto suffered a severe case of hiccups mid-month. The market was hoping that bitcoin at $24,000 had set a new floor and the start of better things to come, but then it slumped on 19 August and for the rest of the month as markets went into a risk-off reversal, particularly on the hawkish Fed news. . By the end of the month, it was hovering around $20,000, dropping around 13% during the month, whilst ether also fell by 7%, making crypto one of the worst performing asset classes for the month.