Weekly View - Dodging the bullets

While NASA’s DART mission tested ways of deflecting hazardous asteroids, financial markets are having to deal with a series of more earthly threats. The sham referendums that led to annexation of four regions in Ukraine by Russia (to which Ukrainian forces responded promptly by taking the key town of Lyman) was just one of several concerning developments in the Ukrainian conflict, including the sabotage of the Nord Stream gas pipelines. Most worryingly, Russia’s operational setbacks could tempt it to turn to tactical nuclear weapons, something that would represent a major escalation at a time when Russia has been developing a nuclear ‘super torpedo’ called Poseidon, capable of causing tsunamis and wiping out coastal cities. In the meantime, we are positive energy stocks.

The UK government has backed down on its plans to cut the top rate of income tax. This was the most controversial aspect of the much-criticised ‘mini-budget’ unveiled 10 days ago that caused severe dislocation in the gilts market. Threats to the pension system’s stability forced the Bank of England to step in to buy unlimited amounts of gilts instead of selling its gilts holdings, as it had planned. We are negative gilts. Although the policy framework is more stable, Germany, like the UK before it, has announced a giant energy relief package even as inflation exceeds 10%. In the US, despite the havoc caused by Hurricane Ian, the economy remains resilient. Durable goods numbers showed a rebound in new orders for core capital goods in August, for example, and jobless claims are still low. This will bolster the Fed’s case for continuing to hike rates. Last week, although she acknowledged the risks the strong dollar posed to the rest of the world, Fed vice chair Lael Brainard spelled out the risks of retreating from the fight against inflation prematurely.

Q3 marked the third consecutive quarter of negative equity returns—something not seen since the financial crisis. Companies like Nike continue to post disappointing figures and/or guidance, while data showed industrial profits in China falling -2.1% in the first eight months of 2022. More positively, Biogen was boosted by the performance of its new Alzheimer drug. We are positive on the healthcare sector but still negative on equities overall. In Brazil, Lula has the edge in the run-off presidential election at the end of this month. Of particular relevance for Brazilian assets will be the economic team he chooses, including his choice of finance minister.  Meanwhile, the 20th Chinese Party Congress, which will start on October 16, will be closely watched for indications on China’s future direction on a host of policies.