Investment environment overview 09/2024

On the backdrop of expected (as well as some unexpected) monetary policy easing, September turned out to be a fairly goodmonth for investors. The Fed cut its Federal Funds rate by 50 basis points to a range of 4.75%-5.00%, the ECB followed with a 25-point reduction, bringing the deposit rate down to 3.50%, while the People’s Bank of China came in with a Draghi-style “bazooka”, sending Chinese stocks prices to the moon. With markets now expecting dollar rates by 50 to 75 basis points lower by the end of the year, bullish sentiment is obviously prevailing, and the main equity indexes are exhibiting notable resilience. The S&P 500 gained 2.0% in September, the Dow Jones Industrial Average increased by 1.8%, while the Nasdaq-100 was up 2.5%. In Europe, however, the STOXX 600 index lost 0.4%, compared with a meager 0.8% rise in the STOXX 50. Moreover, after 796 days of inversion the yield curve has turned positive, suggesting that economic growth in the near futuremay be plausible.

PBOC goes “all in”

During a press conference on September 24, the People’s Bank of China announced the biggest set of new support measures since the beginning of Covid-19 pandemic with the aim to alleviate deflationary pressures. The conference was arranged following the announcement of an interest rate cut by the U.S. Federal Reserve on September 18. The PBOC’s package includes a reduction of the reserve requirement ratio by 50 basis points (from 7.0% to 6.5%) and a 20 bp cut to 7-day reverse repo rate (from 1.7% to 1.5%) which in the future could be followed by 0.20–0.25% reduction in the loan prime rate (currently at 3.35%). To stimulate the capital market, the PBOC plans to establish a swap program that would provide non-bank financial institutions with access to at least 500 billion yuan (71 billion USD) in funding. Additionally, guidelines will be developed for medium-term and long-term investment funds to encourage their entry into the market.

The PBOC also announced new measures to ease conditions in the real estate segment. However, it should be noted that efforts in recent years to revive the real estate sector have been unsuccessful, with the market continuing to struggle with developers’ debts, unfinished projects, and low buyer confidence. Currently, the PBOC plans to reduce the mortgage rate by an average of 0.5%, benefiting around 50 million households. The minimum down payment for second-home purchases will also be lowered to 15% from the current 25%. Nevertheless, to stabilize China’s economy and mitigate the effects of the real estate crisis, fiscal stimulus would be needed, given the weak credit demand from businesses and consumers.

European and US equity markets

Source: Bloomberg and Signet Bank

Es ist nicht gut, Olaf

Stagnation in German and EU economy continued, with important signs suggesting that bad times (again) are around the corner. Growth has proven elusive despite hopes for a rebound early in the year. With a 1.5% drop in production in H1 2024, German businesses appear to be the most affected at the moment, especially in industries like mechanical and automotive engineering. In Eurozone, manufacturing data showed little improvement compared to August numbers, with final manufacturing PMI readings for most European countries well below the 50.0 mark (except for Spain, where final Manufacturing PMI came in at 53.0). The Eurozone’s HCOB manufacturing PMI was clocked at 45.0, a 9-month low, and new orders and output decreased at the fastest rates since December 2023. Annual inflation in the Eurozone currently stands at 1.8%, a 0.4% decrease compared to August. The decrease suggests that tight monetary policy and easing supply chain pressures are starting to positively impact price levels across the bloc.

We need to highlight the issues facing one of the largest employers in Germany, Volkswagen. The company cut its revenue outlook for the second time this year, and now projects an annual operating margin of 5.6%, down from as high as 7%, emphasizing overall decrease in demand, and high material costs for its’ and other European manufacturers’ vehicles. Volkswagen experienced a 11% YoY drop in operating profit for H1 2024, with deliveries in China, VW’s largest market, falling by 7%. VW announced that it will reduce its global deliveries from 9.24 million units in 2023 to 9 million units this year. It had earlier anticipated a 3% increase. VW executives have flagged about two car plants’ worth of excess capacity, putting them on course for a protracted conflict with powerful labor groups. To add to the German pain, Commerzbank currently is in a “fight for independence” after UniCredit has stated that it is considering a takeover of the bank, with German government currently opposing any such efforts.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

Metals and commodities see mixed returns

EUR/USD pair stayed above our first “red flag” level of 1.1000 and was well bid, benefiting from dollar’s softness due to economic uncertainty and easing inflation in the U.S. However, all pair’s efforts to conquer the 1.1200 mark were so far unsuccessful. Gold has hit our next target of $2 600 per

troy ounce and is currently trading in the XAU/USD 2650 region. While still maintaining a bullish posture on the metal, we keep trimming our positions, seeing increased possibility for an overall correction. Silver managed to get over the XAG/USD 32 mark and is ready for the next move up, with our next target set at levels of $34-35 per troy ounce.

September was a volatile month for oil prices due to, from one side, OPEC supply curbs and regional tensions, and, from the other side, overall decline in demand. The slowdown in China’s economy, which saw a fall in oil consumption and a softening of GDP growth, had been a significant contributing reason to the decline, and for the first time since 2021 Brent crude fell below $70 per barrel mark. Yet, with tensions between Israel and Hezbollah (and now Iran) turning into a possible war, Brent futures shot up to $73+ on the first day of October.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

Regional News

Performance of the Baltic stock market in September was modest – the OMX Baltic Benchmark lost 0.08% MoM and 7.14% YoY on fairly thintrading. Amber still can be found on the shores of the Baltic Sea though. While many stocks in the region look overpriced, we can mention Ignitisgrupė as one of a few good value plays with its low valuation relative to peers and strong development prospects in the renewable energy market. The highpoint of the month though was (and still is) the IPO of Eleving Group, which declared its intention to list on the Nasdaq Riga Stock Exchange’s Baltic Main List and the Frankfurt Stock Exchange’s regulated market. Eleving Group is offering up to 24.5 million ordinary shares at a price range of EUR 1.60–1.85 per share. Eleving is a fintech company that specializes in vehicle financing, consumer loans, and leasing solutions.

Gold price, USD/oz

Source: Bloomberg and Signet Bank