Market Review 06/2023

The “holy war” against inflation rages on, as it has now been more than a year since central bankers around the world began raising interest rates to combat that irritating phenomenon. June was rich in decisions to raise rates: the ECB, Sweden’s Riksbank and Swiss National Bank “hiked” by 25 basis points, the Bank of England and Norway’s Norges Bank by 50 basis points, while U.S. Federal Reserve System decided to take a pause. At the same time, the rhetoric of the main bankers remains hawkish – the market is being spooked by further increases in rates and, in addition, promises that rates will stay at high levels for a long time. There is now a widespread acceptance among bond traders that at least one, perhaps even two, more rate hikes should be expected this year from both ECB and Fed.

Equities keep marching on

The stock market continued to rally all across the board – be it value stocks, growth stocks, or small- and mid-caps, while the first half of 2023 was the best since 1983 for the Nasdaq 100, which added 32% for the period. Capitalization of Apple surpassed $3 trillion for the first time, and is now higher than the capitalization of five of the eleven sectors of the S&P 500 combined: materials, real estate, utilities, energy and consumer goods. Technically, the index looks strong and could rise towards the resistance zone of 4600-4650 ahead of the reporting season. On July 14, the financial sector will traditionally start presenting its results: Wells Fargo, JP Morgan, BlackRock, Citi, State Street, while tech gorillas will start reporting towards the end of the month. The market will be watching closely for any signs of a possible deterioration in both sales and earnings.

European and US equity markets

“Summer mode” for FX, PM and energy markets

There was no significant price action in EUR/USD in June, with the pair bouncing off of 1.0700 level and re-testing 1.1000 again. Not much that one can do in the current environment except for keeping her eye on the aforementioned price levels for further clues. We still see 1.1050-1.1100 zone as a strong resistance level, and 1.0500 as a solid support for the euro.

Precious metals were in the “summer mode” too, as prices have barely changed. Overall, we see this as “gathering steam” for the next big move. Silver tested 22.30-22.70 support area and bounced off it, but these levels are not strong enough to confirm that an important bottom is in place (move above XAG/USD 24.60 will be a big relief for bulls). Again, XAG/USD 20 level should not be broken for the immediate bullish thesis to hold.

Volatility was relatively low in oil (particularly) and natural gas markets. Usually such periods are followed by very stormy market conditions and we still consider any drop in oil prices closer to 60 USD/bbl as a potential long position entry point. Natural gas is comparably more active, but still very weak, and on top of that volatility here is falling, which is clearly a very good point to hedge energy risks for those who need to do it.

Gold price, USD/oz

(Almost) no good news on the economic front

In China, industrial activity growth declined in June as businesses got more anxious about the troubled market conditions. Consumer confidence declined and hiring slowed with Caixin/S&P Global manufacturing PMI slightly dipping, though still showing small expansion in activity. Services activity also declined, with expansion at its slowest pace in five months – Caixin/S&P Global services purchasing managers’ index decreased to 53.9 in June compared to 57.1 in May. Composite PMI decreased to 52.5 from 55.6 a month ago.

While U.S. manufacturing fell to the levels last seen when the country was on the brink of the Covid pandemic, raw material price pressures fell, providing some relief for the economy. ISM Manufacturing PMI fell by almost one point to 46.0 in June, which is the lowest reading since May 2020. However, the falling prices of commodities are helping producers – ISM’s index of material prices paid dropped to 41.8, its lowest level this year. According to U.S. government figures released last week, the manufacturing sector, which makes up 11.1% of the economy, shrank by 5.3% in the first quarter of the year on a twelve-month trailing basis.

Manufacturing activity in Eurozone shrank faster than initially anticipated because of the ECB’s continued monetary tightening. Eurozone’s largest economies showed a sharp decline in production during the month with Germany’s manufacturing sector shrinking at its sharpest rate in more than three years, with both manufacturing output and new orders declining. Italy’s manufacturing sector contracted at the steepest rate in over three years, while France’s continued to shrink at a somewhat slower rate than anticipated. Despite further price reduction on manufactured goods, demand in the Eurozone shrank at the sharpest rate in eight months, causing less confident factories to reduce their personnel for the first time since early 2021. Inflation in the block continued to decline during the month, mostly due to the decline in fuel costs, which offset an acceleration in services prices. Inflation in the 20 countries of the common currency decreased to 5.5% in June compared to 6.1% in May.

Benchmark 10-year bond yields

The ‘turn’ that never came

Despite warning signs – inverted yield curves and shockingly bad consumer sentiment, the labor market shows no signs of weakness. We expect that to change any moment now, although, to be fair, we have been expecting this ‘turn’ to be in full swing by now. Nevertheless, evidence is mounting that economic weakness lies ahead. In addition, the shrinking Federal Reserve balance sheet, which continues to drain liquidity from the markets, and unemployment levels that are well below their average, should be kept in mind. There is also evidence that U.S. consumers have burnt through their excess savings and are now faced with higher prices at the stores, higher interest payments and flat salaries.

With that being said, there might be still a couple of tough months ahead for bondholders, as yields keep rising in order to keep up with monetary policies. However, there is hope that by autumn bond markets should “catch a bid” and start their long road to recovery.

High Yield bond Indexes