Euro in record long negative streak, fund managers do not believe in China

At the September meeting, the European Central Bank has indeed raised interest rates for the tenth time in a row, this time by a quarter of a percentage point (the deposit interest rate now stands at four percent and is thus even higher than at the previous record in 2001), but at the same time it announced that with the September hike probably ends the cycle of monetary policy tightening. The response of the stock markets was quite impressive: the pan-European stock index STOXX 600 gained one and a half percent on Thursday, which marked the highest one-day growth in the last six months. On Friday, the STOXX 600 gained a little more to hit a new five-week high. Positive Chinese macroeconomic data (higher August growth in factory activity and retail sales) also helped, as well as the decision of the Chinese central bank to reduce the level of reserve requirements for commercial banks.

Euro in a series of nine consecutive negative weeksThe ECB’s message that additional interest rate hikes are no longer to be expected put an additional burden on the euro, which is only worth $1.066, which is the half-year low. It has lost against the dollar for the ninth week in a row, which has never happened since the introduction of the common European currency. Hedge funds are in the most bearish mood regarding the euro since the beginning of this year, and the downward slide of the euro is of course also a consequence of the worsening economic conditions in the euro area and obvious stagflation. According to the ECB’s latest estimates, this year’s GDP growth will be only 0.7%, inflation remains too high (it is expected to be 5.6% at the end of the year), real estate projects are facing increasingly high interest rates (the six-month Euribor has already climbed above four percent) are stopping, the German car industry is losing strength, the Chinese are simply more competitive. At UBS, they calculated that the production costs of the electric Volkswagen ID.3 are as much as 35 percent higher than the competing model of the Chinese brand BYD Seal.

The period after the last rise in interest rates is very profitable!If Europe is headed for recession, it seems that the US will avoid it, although the real impact of monetary policy tightening will have to wait a little longer. The US Federal Reserve will meet again this week, almost certainly (even though August consumer inflation rose to 3.7 percent) this time leaving interest rates unchanged after raising them by as much as 525 basis points since last March. But unlike the ECB, the Fed still “threatens” that the tightening of monetary policy is not over yet and that the next interest rate hike could follow as early as the end of October. It is precisely these speculations about where the peak of interest rates will be in the US and whether inflation will really begin to approach the target of two percent quickly enough that keep investors very busy, but they can be encouraged by the fact that the period of belt tightening was generally followed by growth in stock indexes. The financial company CFRA notes that in the previous six Fed rate hike cycles, the S & P 500 index gained an average of 13 percent from the last rate hike to the first rate cut (in the new cycle of monetary policy easing).

Arm successfully debuted on the Nasdaq stock exchangeLast week was also marked by the initial public offering (IPO) of British chip maker Arma, which is owned by Japan’s Softbank. In the IPO, the price of one share was 51 dollars (it was the largest IPO in the US this year), trading on the Nasdaq stock exchange began at a price of 56.10 on Thursday, and the last price was 63.59 dollars, which is 25 percent above the price from the public sale. But if there was an encouraging mood in New York on Thursday, also due to the successful debut of Arm Holdings, everything was different a day later. And that’s precisely because of the chip manufacturers! The largest of them, Taiwan’s TSMC, has asked its largest suppliers to postpone the delivery of chip manufacturing equipment. Shares of AMD fell by almost five percent, Nvidia by almost four, Intel by two percent. Arm’s shares opened the day at $69 (a price that puts the company’s market cap well above $70 billion), but ended the day at $60.75, down 4.5 percent on the day. Many of the remaining tech giants also lost, with the Nasdaq slipping 1.56 percent on Friday alone and sinking into the red for the week as well.

Who still believes in China?And in these times, when it is really thankless to predict the future, how do the great ones act? The latest Bank of America survey of fund managers showed a marked shift from emerging markets to US equities. The main motto was “avoid China”, which partially influenced the decrease in exchange rates on the Ljubljana Stock Exchange. If in February 78 percent of respondents expected stronger Chinese economic growth, now not a single respondent believes in such a scenario. The opinion of well-known billionaire Ray Dalio from Bridgewater Associates is also interesting. He emphasized that he currently prefers cash positions to bonds, even though the yield on the 30-year US bond is almost 4.5 percent. As he says, for him, bonds are not a good investment in the long term and that investors, disappointed by low real interest rates (that is, taking into account inflation), will eventually start selling bonds, which will further push their required yield up.