Weekly View – Goodbye and Thank You, Roger
The retirement of the great Roger Federer coincided with the biggest weekly drop in US equity indexes since mid-June. The main trigger was the higher-than-expected consumer inflation figure for August, especially core inflation. But there were other catalysts too, including a rise in the 30-year fixed US mortgage rate to over 6% for the first time since 2008, while a preliminary wage agreement for railroad workers will put further pressure on wage inflation. There are also mounting investor concerns over earnings. GE warned that supply-chain troubles were weighing on its margins, while the share price of bellwether delivery giant FedEx dropped heavily after it announced office closures and a hiring freeze due to declining package volumes. Seeing recession as inevitable (but not imminent), we are underweight equities. We expect the Fed to raise rates by another 75bps when it meets on Wednesday. It will not be alone: between Tuesday and Thursday we will see decisions from central banks in Sweden, Japan, Switzerland (where we expect a 75bps hike), Norway, the UK, Turkey, South Africa, Brazil, Taiwan, Philippines, Indonesia and Egypt.
The German government has decided to take over Rosneft’s stakes in three German oil refineries to ‘safeguard Germany’s energy supply’. This is another indication of the urgent need for that country to reconfigure its energy supply after having relied on Russian supply for the last 40 years. Meanwhile, Italy is preparing a EUR13 bn energy aid package while at an EU level, the three main planks of proposals to tackle the surge in energy prices remain: a price limit of €180/MWh on non-gas power plants; a windfall tax on fossil-fuel electricity producers; and a 5% to 10% cut in electricity power use. The European high-yield bond market reopened last week when Italy’s biggest gambling company launched a EUR350 mn five-year debt issue at a hefty 9.75% yield. In January, the average yield for debt of the same maturity in Europe was 2.8%. The substantial rise in borrowing cost has negative implications for highly leveraged companies that benefitted from the low cost of financing in the recent years. We are avoiding high-yield bonds.
While last week’s meeting between Vladimir Putin and Xi Jinping in Uzbekistan was scrutinised to gauge the Chinese attitude to the war in Ukraine, Xi also commented that China was “willing to work with Russia to support each other's core interests”. We take this as pointing to further Chinese de-coupling from the US and greater polarisation. We therefore expect volatility to continue."