It was a terribly ugly day across the equity and bond markets yesterday.
But despite the financial calamity, Porsche had a successful IPO and secured the valuation it was looking for, even though the shares ended flat the first day of trading on the back of an overall morose investor mood.
Then, the Americans took over a red session from the Europeans, and they kept selling as the Federal Reserve (Fed) officials continued their hawkish talk on how they will continue rising the interest rates in the US despite the massive financial crisis.
Cleveland Fed head Loretta Mester joined her colleagues in the idea of fast tightening yesterday while a couple of other FOMC members including Lael Brainard and John Williams are due to speak today to further batter the global financial markets.
The US yields have eased along with the UK yields on the back of the BoE intervention the day before, but are again pushing higher, with the 2-year yield consolidating around 4.20%, and the 10-year yield, around 3.80%.
Due today, investors will focus on the US income, spending, but more importantly the PCE data. The world is praying for a sufficiently soft PCE to cool down the selling pressure on bonds and equities.
The S&P500 plunged another 2% yesterday and wiped out the summer gains entirely. The same is true for Nasdaq. Nothing is left from the summer rally in the US stocks.
Apple dived more than 6% and closed the session almost 5% lower yesterday, after Bank of America downgraded the stock on worries of weaker consumer demand.
This is a big deal, because big banks downgrading Apple is quite a rare event!
The BoFA analyst cut his PT from $185 to $160 on the back of ‘material negative revisions driven by weaker consumer demand’. They said that services already slowdown, and that they expect products to follow.
The report came out a day after Apple, itself, took a step back from its plan to produce more iPhones this year, compared to last years, as the Chinese demand for the new iPhone14 fell 11% in the first three days compared to last year. And Chinese stand for 1 out of 5 iPhone buyers. As a result, BoFA expects the iPhone14 cycle to be weaker, and the fact that people will buy more expensive Pro model won’t make up for the revenue loss of selling less iPhones overall.
Elsewhere, Facebook’s Meta joined the others in announcing job cuts.
But **unfortunately** for the Fed, the US jobless claims came below 200’000 last week. There are not enough people losing their jobs to stop the financial bleeding in the world.
The dollar down
One interesting thing about yesterday’s price action was that… the US dollar sharply eased despite the hawkish messages thrown to our faces by the pitiless Fed members.
Some believe that the Bank of England (BoE) intervention may have played a role in the softening dollar, others think that the fact that the European Central Bank (ECB) gets more aggressive helps taming the dollar rally. But some others point that yesterday’s dollar selloff could simply have to do with the Chinese selling dollars to buy the yuan to tackle the relentless appreciation in the US dollar.
Bailey could become a national hero, or a disaster
The British pound recovered above the 1.11 mark against the US dollar yesterday. Could the pound rebound sustainably, or is this just a fake alert?
I genuinely believe that sterling could recover sustainably if the BoE plays a good game. The BoE has a very hard task now: it must deal with the globally higher inflation – which requires a tight monetary policy, and it must deal with Liz Truss – and her spending that the market doesn’t want to finance – which requires the BoE buying bonds.
But because the BoE can’t afford to loosen the monetary conditions – due to high inflation -, the BoE’s bond buying will lead to steeper rate hikes in the UK to compensate the surprise QE.
Investors now expect 125-150bp hike at the BoE’s next meeting. And Bailey has no choice but to deliver, if he wants to gain investors’ confidence – that the government lost big time.
So, at the end of this process, either Andrew Bailey – who has been quite unpopular so far – will be a national hero, by keeping the UK sovereigns above water, gaining control over inflation and stabilizing sterling, or it will be a disaster for the UK.