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Monthly update: August 2022

August Performance: -25.10%

YTD: -65.26%

How is it September already? Summer is over and autumn is upon us. It's been a horrendous couple of months for me trading wise and so I have to admit I am glad to see the back of it!

The financial markets have been incredibly difficult to trade, for me anyway, and I am sorry to advise on yet another very disappointing month.

U.S. stocks fell for a fourth-straight day on Wednesday, the last trading session of August, putting the summer market comeback in doubt as investors weighed the Federal Reserve’s inflation-fighting efforts.

The Dow slid nearly 0.9%. The S&P 500 lost about 0.8%, and the Nasdaq Composite fell roughly 0.6%.

The Dow closed the month down about 4.1%, while the S&P and Nasdaq recorded losses of 4.2% and 4.6%, respectively.

Investors are debating whether stocks will again challenge the June lows in September, a historically poor month for markets, after weighing recent hawkish comments from Fed officials who show no signs of easing up on interest rate hikes.

“If we retest the lows, I think it happens in September,” SoFi’s Liz Young said Wednesday on CNBC’s “Closing Bell: Overtime.” However, she added, “I think in order to do so, something would have to get materially worse than it was on June 16,” when stocks bottomed, such as earnings revisions that come in worse than investors are expecting.

Meanwhile, shares in the Asia-Pacific are trading lower Thursday as investors digested the results of a private survey on China’s factory activity which showed the sector slipping into contraction this month. U.S. stock futures fell on Thursday morning.

U.K. factory activity offered a rare upside surprise in August, with the the S&P Global/CIPS manufacturing PMI coming in at 47.3 against a consensus forecast of 46.0.

Despite outpacing expectations, the reading still represents the worst month for British factories since May 2020, as the country battles a historic cost of living crisis.

Euro zone manufacturing activity contracted for a second consecutive month in August, according to a final S&P Global final manufacturing PMI (purchasing managers’ index) reading on Thursday.

The PMI slipped to 49.6 in August from 49.8 in July, and came in below an initial flash reading of 49.7. The 50 mark separates growth from contraction.

Like many economies, the euro zone faces a cost-of-living crisis fueled by soaring food and energy bills, which are increasingly forcing consumers to curb spending.

Oil prices tumbled on Thursday, as new Covid-19 lockdown measures in China added to worries that high inflation and interest rate hikes are denting fuel demand. Brent crude futures fell $2.10, or 2.2%, to $93.54 a barrel by 1013 GMT. U.S. West Texas Intermediate (WTI) crude futures slid $1.86, or 2.1%, to $87.69 a barrel.

“Western-world oil demand, as well as China’s, is stagnant, while supplies are expanding incrementally, largely on the back of the U.S. shale boom,” said Julius Baer analyst Norbert Rucker.

Asia’s factory activity slumped in August as China’s zero-Covid curbs and cost pressures continued to hurt businesses, surveys showed on Thursday, darkening the outlook for the region’s fragile recovery.

Southern Chinese tech hub Shenzhen tightened Covid-19 curbs as cases continued to mount, with large events and indoor entertainment suspended for three days in the city’s most populous district, Baoan.

The main European stocks index fell to seven-week lows on Thursday on deepening worries about aggressive rate hikes and record-high inflation in the region. A possible revival of a 2015 Iran nuclear deal which would allow the OPEC member to boost its oil exports also weighed on prices.

French President Emmanuel Macron said on Thursday he hoped a deal would be concluded in the coming days.

Recent oil market volatility has followed concerns about inadequate supply in the months after Russia sent military forces into Ukraine and as OPEC struggles to increase output.

OPEC’s output hit 29.6 million barrels per day (bpd) in the most recent month, according to a Reuters survey, while U.S. output rose to 11.82 million bpd in June. Both are at their highest levels since April 2020.

Still, the oil market will have a small surplus of just 400,000 bpd in 2022, much less than forecast earlier, according to OPEC and its partners - known as OPEC+ - due to underproduction of its members, data from the group showed. The group expects an oil market deficit of 300,000 bpd in 2023.

Meanwhile, U.S. crude stocks fell by 3.3 million barrels, the U.S. Energy Information Administration said on Wednesday, while gasoline stocks were down 1.2 million barrels.

Finance ministers from the Group of Seven group of wealthy nations will discuss the U.S. Administration’s proposed price cap on Russian oil when they meet on Friday, the White House said.

Gold prices briefly slid below the key $1,700 psychological level for the first time in six weeks on Thursday, as major central banks stuck to an aggressive stance to combat inflation, dulling demand for non-yielding bullion.

Spot gold fell 0.7% to $1,699.10 per ounce, having touched its lowest since July. U.S. gold futures shed 0.9% to $1,711.

“The direction of least resistance looks lower just now for precious metals with the strong dollar continuing to weigh on the market,” said independent analyst Ross Norman.

“Expect gold to trade down to test the $1,680 level,” Norman added.

Gold prices have come under pressure as multi-decade high inflation forces central banks around the world to tighten pandemic-era monetary policy. The metal has dropped more than $350 since scaling above the $2,000-per-ounce level in early March, and marked a fifth monthly drop in August, their longest run of monthly losses since 2018.

The dollar also held firm at close to a two-decade peak, heaping pressure on gold by making it expensive for buyers holding other currencies.

Attention now turns to today’s U.S. weekly jobless claims due at 1230 GMT and non-farm payroll report on Friday.

“A strong labour market could pave the way for a more aggressive Federal Reserve, which is bad news for non-yielding gold,” Fiona Cincotta, Senior Financial Markets Analyst at City Index said in a note.

Treasury yields rose Thursday after data showed a significant slowdown in private payroll growth and U.S. equities continued a sell-off.

The 10-year Treasury yield was up 6 basis points to 3.1984% at 5 a.m. ET, while the yield on the 30-year Treasury bond gained 5 basis points on the day to 3.3107%.

The 2-year Treasury note yield was 4 basis points higher, trading at 3.4953%. The yield on the short-term note has not been this high since 2007.

Yields move inversely to prices, and a basis point is equal to 0.01%.

Yesterday, a jobs report from payroll processing company ADP showed U.S. private payrolls grew by 132,000 in August, a deceleration from 268,000 in July.

ADP’s chief economist, Nela Richardson, said it could show the U.S. at an inflection point, moving from “super-charged job gains to something more normal.”

Markets are closely watching data releases amid fears of an economic slowdown in the U.S., after Federal Reserve Chair Jerome Powell said it may be necessary to cause pain to the economy in order to bring down inflation. Other Fed officials have also expressed hawkish sentiment this week.

U.S. stock market averages have seen losses in all four sessions since Powell’s speech Friday, and had their worst August in seven years. Gold prices have fallen to a six-week low on a stronger dollar.

Thursday will see the release of initial jobless claims and labor productivity and unit labor costs data, ahead of the Bureau of Labor Statistics’ nonfarm payrolls report on Friday.

The U.S. Treasury will auction $45 billion in 8-week bills and $50 billion in 4-week bills.

Sterling fell against the dollar on Thursday, adding to August losses that were its worst since late 2016, as storm clouds gather over the British economy.

The pound was down 0.5% at $1.1565, having fallen to its lowest since March 2020.

The pound lost 4.6% against the dollar last month in its worst performance since October 2016, fuelled by concerns about slowing growth in the British economy as inflation gathers pace. Sterling also suffered its worst month against the euro since mid-2021. Against the euro, the pound fell 0.1% to 86.55 pence.

British inflation soared to 10% in July, its highest in 40 years, and is predicted to climb higher, squeezing the pay packages of hard-hit consumers further. British government bonds are suffering, too, enduring their biggest monthly fall since 1994. The pound has lost over 14% against the dollar so far this year. “This is getting serious,” analysts at ING wrote.

“Our premise for sterling staying supported was that foreign owners of Gilts would have to cut FX hedge ratios because of rising sterling hedging costs. That view is, shall we say, challenged by foreign investors dumping Gilts.”

Traders said sterling may test its low of $1.1413, plumbed in March 2020 as the COVID-19 pandemic wracked markets.

Sterling’s problems have been compounded by a strengthening dollar. The U.S. dollar index which measures the greenback against a basket of currencies, was up 0.18% at 108.93, not far off its two-decade high of 109.48 hit on Monday.

The greenback hit a 24-year high against the Japanese yen on Thursday, with investors expecting sharply higher U.S. interest rates while those in Japan are seen as staying low.

“It’s not just sterling weakness - it’s a dollar strength story,” said Michael Hewson, chief markets analyst at CMC Markets. “Sterling has its problems, but they are not unique to it - high inflation, surging energy prices and falling disposable incomes.”

I have four months remaining to attempt a recovery and it is going to be a massive challenge but one I am really looking forward to.

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