• Summer market rally lost its steam
  • Jackson Hole symposium brought hawkish message from the Fed

Financial markets’ price development 

The first half of August was positive for equity markets, but after Federal Reserve Chair Jerome Powell speech about future monetary policy steps, markets turned around. The US S&P 500 index (S&P 500 Total Return EUR Index), which represents major 500 US companies decreased by 2.71 % during the month. Similar results were showed by developed markets (MSCI World Total Return EUR Index) which also decreased by 2.84 %. Same as last month emerging markets outperformed developed markets and managed to generate positive 1.83 % return (MSCI Emerging Markets Daily Net Total Return EUR Index).

The August started with geopolitical headwinds in Asia, when US White House speaker Nancy Pelosi decided to visit Taiwan showing commitment and support to the region despite China’s objections. This visit was the highest‑ranking US official in a quarter of century. The US official’s trip was not welcomed by China. Immediately, China announced trade sanctions to Taiwan and started its most provocative military drills around the island. Also, Chinese president Xi Jinping sent a political message to US president Joe Biden not to play with the fire showing his rage. China declared that Taiwan is a rebellion part of it and one day it will be brought back even with force if necessary. Markets followed these geopolitical developments, but it did not have a greater effect on the market prices. 

Earlier in August developed markets continued to increase following market trend which started in mid‑June. The market sentiment was bolstered by the shift from better‑than‑expected earnings to better‑than‑expected economic data. Markets moved upward after consumer pricing and manufacturing data indicated that inflation may cool down and it would allow US Federal Reserve Bank to ease monetary policy. The main US market index S&P 500 which represents the biggest 500 US companies managed to recoup more than 50 % of the losses between January peak and mid‑June bottom. After this bounce back market participants started arguing if it was the beginning of new bull market or just a bear market rally.

Implied Overnight Rate & Number of Hikes/Cuts

Source: Bloomberg L.P.

The main market event for the financial markets was Jackson Hole economic symposium on 26th of August which is attended by central bankers, finance ministers, academics, and financial market participants from all around the world. After the symposium FED chairman Jerome Powell during the press conference sent clear message to the market that the main goal for central bank is to restore price stability which requires to maintain restrictive monetary policy. He warned market participants that keeping restrictive monetary policy could be painful for households and businesses, but not as painful as living in the elevated inflation environment.  It was clear signal for the market and market indices turned around immediately confirming that the two‑month long summer rally could have been just a bear market rally.

“House view” update

Luminor Investment management team decided to maintain lowered risk allocation budget and higher exposure to defensive sectors (utilities, energy, and consumer staples). High uncertainty about possible consequences of the war in Ukraine, tightening monetary policy, high volatility in the markets and slowed economic growth warrant such decision.



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