Ukraine strikes back
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Equities enjoyed a strong week, with the S&P 500 posting its highest weekly return since November 2023 as volatility eased sharply and economic data increased market confidence that the US will avoid recession. Annual inflation was soft enough to seal the deal for a September rate cut by the Federal Reserve, but not weak enough to tilt the scales to a larger 50bps cut. Robust retail sales and strong results from a major retailer showed consumer demand is still resilient once prices are lowered. Equity markets celebrated the reports, with the S&P 500 rising nearly 4%i (in USD) on the week and the Nasdaq up 5.3% ii (in USD). In bonds, US 10-year Treasury yields dipped 5bps to 3.89%. In the UK, inflation surprised to the downside in July, supporting the case for two more rate cuts by the Bank of England this year. In Asia, Japan’s Prime Minister Fumio Kishida surprised markets with his decision to step down as leader of the ruling Liberal Democratic party in September, leaving the party to find a new leader who will become prime minister. The Japanese yen lost 1% on the week allowing Japanese equities to rally 7.8%.
GEOPOLITICS
Ukraine’s unexpected invasion of Russia’s western Kursk region caught Moscow off guard, raising questions about the future course of the conflict between the two countries, with Russia’s response uncertain.
KEY DATA
In the US, the core consumer price index (CPI) reading fell to 3.2% from 3.3%. The headline CPI year-on-year reading fell to 2.9%, the first sub-3% reading since 2021. Also in the US, July retail sales rose 1.0% on the month.
In Asia, Japan’s economy grew an annualised 3.1% in the April-June quarter from the previous three months. In China, private activity indicators remained on the weak side in July. Foreign investors pulled a record $15bn out of China in the second quarter.
In Europe, German investor morale posted its strongest fall in two years. UK July headline inflation rose from 2.0% to2.2% in July (vs consensus 2.3%).
MARKET VIEW
Geopolitical risks are to the fore again, with Ukraine’s invasion of Russia’s Kursk region helping push the gold price above USD2,500 per ounce. The WHO has also declared mpox a global health emergency and tensions are heightened in the Middle East. This week we will see whether talks on a Gaza ceasefire deal bear fruit. We like gold as a hedge against geopolitical risk.
This week also sees the annual gathering of central bankers in Jackson Hole, with Fed Chair Jay Powell due to speak about the US economic outlook. We expect the Fed to make three 25bps cuts this year, starting in September. We will also watch results from some big US retailers this week after one executive spoke of a “deferral mindset” among consumers and as data from across the US economy show it is not out of the woods yet.
After the flash crash in Japan, we expect uncertainty and volatility in markets to persist, so there is no rush to increase exposure. We remain neutral equities, as we see no US recession. Among corporates, a mega merger – the biggest this year – between two food companies underlines our M&A theme. Meanwhile in politics, Kamala Harris will aim to turbo charge her presidential campaign at the Democrats’ convention this week.
