What goes up...

Few words sum up the price action of the last couple of weeks. The user experience has been utterly hellish for many, sprinting the marathon of pain and surprise at every corner. Time always seems to be on fast-forward in markets but even considering such benchmarks keeping on top of it all is nigh-on impossible even with excesses in caffeine, matchsticks for the eyes, face glued to Bloomberg.

We are now into the final quarter. Has this year been that bad so far? Well, actually not great were you an equity investor, and even worse if you are dollar-based entering some of these exchanges, as clearly highlighted below.

Courtesy of Bloomberg LP

It seems a pretty tall order to get anywhere near flat for NYE. Should we seek comfort in the fact that at least inflation is high so the losses become less material? Probably also a stretch.

On the subject of prices actually rising unlike several asset classes that seem to be more susceptible to the gravitational pull of central bank unwinds, a “soft landing” or “growth recession” seems a long shot right now, to put it nicely. Funnily enough, jacking rates up hard and fast has done little to bring down the cost of food, grease global food supply and plug the various “leaks” to key pipelines randomly occurring and causing large reverberations in energy markets, directly contributing to us all feeling poorer. Perhaps the answer is fiscal? Queue the Kamakwasi Budget. Perhaps not.

Looking in more detail at the Euro, less than a month ago we saw the deposit facility enter positive territory for the first time since May 2014, around the time Brazil hosted the FIFA World Cup, eventually losing to Germany in the semi-finals, an embarrassing 1-7 defeat. Having visited just prior and again over this summer gone, despite being forever branded the economy of tomorrow one thing is for certain: looking at the price of petrol and more broadly energy, at a fraction of Europe’s, from that perspective at least they are now looking like winners. Their beer is also colder than the surface of Mars, whilst the beaches of Rio bask in 25 degree sunshine (in winter), what is not to like?! Even their stock market and currency is in the green…

More than other markets, the Eurozone continues to suffer from high degrees of excess liquidity along with uncertainty as to where and how it should actually end up. Unlike the BoE and Fed, the ECB lacks for now an overnight home a la Reverse Repurchase Facility (RRP) whereby participants are guaranteed a floor along with the uninterrupted sleep benefits of being parked at the Fed and backed by government bonds. The messaging remains clear, despite fragmentation politically with the rise of the rather right in Italy, and their yields going rather wrong. The only way is up. In size. For now at least.

As ECB President Lagarde stated at the last press conference, the ECB is “data-dependent, operating meeting by meeting”. Whilst we have all assumed to date that this data is around (rampant) inflation it does beg the question of what will break as the pace of hikes catches many off guard, and which data then takes precedence? Australia has already shown signs of cooling taking place having been one of the first to “go” and now the first to “only” hike 25 basis points, half the expected hike the market had positioned for. It is one thing for an individual or company to face insolvency, entirely another if we enter a world of Sovereigns again being challenged to the brink.

The fallout from the UKs mini-budget has been reported on almost to death. The only good news in the eyes of those investing in the UK was the reversal. An island nation still healing from the loss of the greatest of monarchs and humans thrown straight into a crisis of confidence. What is less obvious is some of the unintended consequences.

The impact on the value of government debt and subsequent selloff with poor liquidity led to the Bank of England effectively bailing out the pension fund industry. It was nothing less than the Northern Rock moment for the sector. Once again, our foe, maturity mismatch the culprit. As if that was not enough, the very same funds that have been helped have called on capital allocated, you guessed it, on call. But is it really? Where? Money market funds? Cash on demand? Notice deposits? Sadly not…another part of the industry has now been hit by those very same structural vulnerabilities. Property funds, that super liquid asset class (?!) have been forced to freeze redemptions to deal with unexpectedly large calls for cash. The sector is different but the teaching the same.

Either way this has left us all wondering what the price of a mortgage will be and how we are going to cover the increased cost of, well, everything. The budget designed to put more in all of our pockets has done the exact opposite and by multiples, likely also forcing the bank to raise rates higher and faster to attempt to do enough to avoid further crisis. To top it all off rating agencies have put Blighty “on watch”. Later this month both they and Moody’s will be publishing their latest. Lets hope there is more faith in and evidence of a budget that has been balanced.

Dollar remains king and the US seems to power ahead thus far despite raising rates like they are about to go out of fashion. Which they will. Early signs of strain are once again emerging in bricks and mortar. What is remarkable and across the core jurisdictions we cover, is the resilience of the labour market. No fresher nor more poignant example just yesterday of one leading indicator in the form of the JOLTs job report. It measures the number of open vacancies, which declined over 1 million and the lowest since June 2021, which was not exactly prime expansion time. In isolation and as a single data point not overly insightful, but considering the number of vacancies per job searcher has dropped to below 2 the market can be considered tight. Another measure of employment change, from ADP, also showed a heathy increase in payrolls in September by more than 200K (of a sample size of approximately 24MM to put it into context).

This will potentially put a spring in JPows step as he continues to walk the higher faster and furious rate talk. As a consumer-based economy is there a limit at which the strong dollar starts to impact negatively? It is certainly helpful in containing imported inflation and could even be a smart way to create deflation. The less obvious or perhaps immediate cost is the one borne by those working hard to manufacture goods or services destined for overseas markets where they are being completely priced out. Far from optimal. There is always a trade-off.