Investment environment overview 08/2024

In August, tensions in the Middle East and Ukraine escalated, while the U.S. political landscape witnessed significant developments. Kamala Harris continued her presidential campaign, facing tight polling against Donald Trump in key swing states of Arizona, Georgia and Wisconsin. Acting VP also named Tim Walz as her running mate, energizing the Democratic base. Meanwhile the S&P 500 demonstrated notable resilience, closing the month just below its record highs, which it reached in mid-July. However, the market saw increased volatility amid concerns over high valuations and mixed economic signals. While energy and healthcare sectors experienced difficulties, investors continued to switch their attention from high-growth, mega-cap tech companies to value and small-cap investments, with focus shifting to consumer discretionary and communications.

Decent month for equities, but concerns remain

Nvidia, having developed their new Blackwell chip, reported better than expected Q2 results, cashing $30 billion in revenue, up 15% from the previous quarter and 122% YoY. Its data center division generated $26.3 billion in revenue – a 154% rise over the same period last year – and was a major contributor to such a successful quarter. Additionally, Nvidia’s net income increased to $16.6 billion, a 168% increase YoY. Although pleased with the results, investors voiced doubts about the company’s capacity to sustain its quick development, which caused stock price to fall, hitting the $99 mark on August 7.

The Nasdaq-100 gained 1.1%, while the Dow Jones Industrial Average added 0.6%, thus registering an all-time high of 41,585.20, and the Russell 2000 increased by 2.0%. As more economic data points to cooling inflation, confidence grows in the potential for a September rate cut, giving small caps a boost. The STOXX 600 Index has gained nearly 10% from its six-month lows – the index hit 9,487.05 points on August 6, following a steep global selloff. Still, we refrain from buying recommendations for now – equities are technically overbought, share buyback window in the U.S. begins to close and uncertainty surrounding election outcomes (and thus potential policy changes) grows.

European and US equity markets

Source: Bloomberg and Signet Bank

Bankers gather in Jackson Hole; yield curve flattens out

In late August, the yearly Jackson Hole Symposium convened. The main topic of conversation was the U.S. economy’s continuous expansion in spite of high interest rates. This resilience casts doubt on the widely held belief that higher interest rates sharply increase unemployment and impede growth. One of the symposium’s highlights was Jerome Powell’s speech, which addressed worries about how monetary policy may affect the economy. The question of whether supply-side enhancements, such as solid labor market and improved supply networks, were mitigating the unfavorable effects of restrictive monetary policies, was discussed. Powell went on to say that the Federal Reserve might begin cutting interest rates as early as September, and the market responded favorably, with equity indexes rising and bond yields falling after the speech.

In the meantime, as of August 30, the yield on the 10-year U.S. Treasury note had dropped below 4%, reaching 3.91%. The yields have decreased considerably from their April top of 4.70% and their October 2023 peak of about 5.00%. While this is typically viewed as a favorable trend that will provide bond investors with positive overall returns, it also exacerbates the flattening of the yield curve. By the end of August, 2-year Treasury yields stood at 3.92%, while the 10-2 Treasury yield spread remained stable at 0-0.01%, indicating that investors see a potential for the overall market slowdown.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

First red flag hit

Volatility on the FX market is slowly picking up. EUR/USD pair has hit our first red flag at 1.1000 and went all the way up to 1.1200. It is too early to call the long-term trend change, but warning signals are there and dollar bulls are walking on thin ice at the moment. Meanwhile we definitely would not short the pair, as we need to see EUR/USD trading back below 1.0950 to return to neutral and / or bullish outlook for the greenback. Any further progress above 1.1300 adds to risk to a long-term dollar weakness. Increase in volatility might cause some larger disorderly fluctuations as market positions itself for a big directional move.

Precious metals are seeing good bids, as gold keeps on posting new all-time highs although its advance is slowing down. Our next XAU/USD target is 2600, but we might see a small correction to XAU/USD 2400 levels first. Silver and platinum are still lagging behind, but do look bullish to us. With all the noise around, oil and gas are trading on a surprisingly low volatility and nothing particularly interesting can be said regarding these two commodities.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

No surprises in economic data

In Eurozone, the manufacturing data for August hardly indicated any improvement in the sector, with final PMI readings being well below the 50.0 threshold. The HCOB Eurozone Services PMI increased to 53.3 from July’s 51.9, indicating the fastest rate of development in the bloc’s services activity since April (perhaps one should thank Paris Olympic Games), while the Composite PMI increased by one point to 51.2. According to Eurostat, annual inflation in the block stood at 2.2%, which is lower than July’s reading of 2.6%. This decrease suggests a moderation in price pressures within the Eurozone, potentially reflecting the impact of recent monetary policy measures and easing supply chain disruptions.

In August, the Caixin China General Manufacturing PMI increased by 0.6 points to 50.4 from the previous month. On the other hand, the official manufacturing PMI showed continuous contraction in the sector, dropping from 49.4 in July to 49.1, according to the data from the National Bureau of Statistics. China’s official non-manufacturing PMI increased marginally and stood at 50.3.

The ISM Manufacturing PMI marked the 21st monthly contraction in U.S. factory activity in the last 22 periods. Four manufacturing industries reported growth in new orders, while 11 industries reported a decline. Of 18 industries, only three reported employment growth. On the other hand, services PMI indicated sector expansion for the 48th time in 51 months, coming in at 51.5. The Business Activity Index also showed growth with a reading of 53.3 in August – 1.2 points less than the July numbers. 10 industries indicated a rise in commercial activity, while 7 reported a slowdown. According to Bureau of Labor Statistics, annual unemployment rate in the U.S. was 4.2%, while, non-farm employment change was at 142k, which is worse than expected (164k), but much better than the July figure (89k).

Gold price, USD/oz

Source: Bloomberg and Signet Bank

Regional news

It is earning season in the Baltics as well, though performance of regional equity indexes is rather modest, with OMX Baltic Benchmark Growth Index closing with a 0.4% monthly gain (and -3.1% YoY). The highlight of the month was the banking license received by Indexo, becoming the first new credit institution in Latvia since country joined the Eurozone in the 2014. Indexo will prioritize serving retail customers, specializing on consumer loans and savings management, with the eventual goal of becoming a “neobank” (like Revolut). The possible IPO of airBaltic, which has drawn a lot of interest in regional media, was another noteworthy development. In order to increase the transparency and market appeal of the ownership structure, airBaltic has chosen to combine four current share classes into one. With the current 98% ownership stake in the carrier, the Latvian government intends to retain a 25% stake after the IPO, as airBaltic wants to raise up to EUR 300 million.