Ormiga Weekly Market Update: 22nd September 2023

US

This week, U.S. stocks faced a challenging period, with all three major indexes registering losses. The Dow Jones Industrial Average dipped by 1.89%, the S&P 500 shed 2.93%, and the Nasdaq Composite slipped 3.62%. This downward trend continued on Friday, marking the fourth consecutive day of declines. Investor sentiment was strongly influenced by signals from the Federal Reserve, which indicated its intention to maintain higher interest rates for an extended period. Bond yields surged following the central bank's announcement of a projected rate hike in 2023, with the benchmark 10-year Treasury yield reaching levels not seen since 2007.

The Federal Reserve's decision to leave its benchmark interest rate unchanged was a significant development midweek, signaling a pause in its aggressive stance on combating inflation. The Fed's projections included expectations of one more rate hike this year, followed by an anticipated decrease in rates starting next year. Furthermore, the outlook for U.S. economic performance appeared more optimistic, with an expected economic growth rate of 2.1% in the coming year, a stark contrast to the 1% growth rate predicted just a few months ago. Although inflation has moderated compared to its peak last year, it remains slightly above the Federal Reserve's target rate.

Amid these market dynamics, the U.S. dollar gained ground against a basket of currencies, highlighting the relative strength of the United States compared to other major economies. S&P Global's Composite PMI index for September revealed a slight dip, falling from 50.2 in August to 50.1, hovering just above the crucial 50 level that separates expansion from contraction.

Additionally, it's worth noting that global fund managers have been showing renewed interest in the U.S. stock market. Data from Bank of America's survey, spanning back to 1999, indicated that these investors have significantly increased their exposure to U.S. stocks this month, marking the first time in over a year that they have held an outsized allocation in U.S. equities. This suggests that investors who had been observing this year's unexpected stock market rally from the sidelines are now reengaging in the market, positioning their funds for potential opportunities ahead.

Mexico

Mexico is currently enjoying a promising financial outlook, marked by a consistent drop in inflation and steady economic growth over four consecutive months. The annual inflation rate has now reached 4.44%, representing the ninth consecutive fortnight of reductions and hitting its lowest point since March 2021 when it stood at 4.12%. This positive trend is reinforced by Inegi's economic growth indicator for July, which indicates a 0.2% month-on-month increase in economic activity, translating to an impressive annual growth rate of 3.5%. The engines driving this expansion are primarily the construction and manufacturing sectors, showcasing annual growth rates of 12.49% and 1.99%, respectively, as highlighted by Banco BASE's analysis.

However, Mexico's recent imposition of tariffs on imports from various trading partners, including China, has introduced an element of uncertainty. These tariffs, ranging from 5% to 25%, encompass 392 imports from countries lacking free-trade agreements with Mexico and went into effect on August 16. Significantly, these measures impact nearly 90% of Chinese exports to Mexico. China has emerged as a pivotal player in Mexico's trade landscape due to supply chain shifts and increased exports and investments in the country. These changes have been spurred by the Sino-U.S. trade tensions that began in 2018, prompting some Chinese businesses to establish factories in Mexico or utilize the nation as a transit point for re-exporting goods to the American market, effectively diversifying their supply chain options.

In terms of currency dynamics, Mexico's peso rose against the dollar this week, surpassing its regional counterparts. This rise in the peso's value was partly influenced by inflation data, which lends support to the argument for Mexico's central bank to maintain record-high interest rates. Despite the ongoing decline in inflation, it still hovers above the central bank's 3% target, which has implications for monetary policy decisions.

Europe

The ongoing conflict in Ukraine has had a significant and adverse impact on European economic growth, exacerbating inflationary pressures across the continent, according to a study conducted by the Swiss National Bank. Since Russia's invasion of Ukraine in February 2022, Europe has grappled with surging energy prices, financial market instability, and the contraction of both Russia and Ukraine's economies. Focusing on the economic consequences for major European nations, including Germany, Britain, France, Italy, and Switzerland, the study revealed that, had Russia not invaded Ukraine, economic output would have been between 0.1% and 0.7% higher in the fourth quarter of 2022. These findings underscore the multifaceted impact of geopolitical conflicts on regional economies.

In the United Kingdom, economic conditions have evolved in a manner that defied earlier expectations by the Bank of England, prompting a shift in monetary policy. The Bank's monetary policy committee (MPC) recently decided to maintain interest rates at 5.25%, signaling a pause in a series of interest rate hikes that began in December 2021. This change comes in response to a more pronounced economic slowdown than initially anticipated. An unexpected decline in headline inflation in August has further contributed to this decision, reflecting the strain on businesses and consumers who are adjusting to higher borrowing costs and consequently reducing spending.

Meanwhile, Germany, once an economic powerhouse in Europe, is now facing a prolonged recession in 2023, making it the sole major European economy to experience economic contraction during the year. The European Commission, the executive arm of the EU, predicts a 0.4% decline in economic activity for Germany this year. Germany's long-standing economic strategy, built on becoming a leading supplier of manufactured goods, is being challenged as it grapples with changing dynamics in energy costs and competitiveness. The need for a new economic strategy has become increasingly apparent, not only for Germany's sake but also for the broader European economy.

On a more positive note, Spain's economic resilience has been showcased through upward revisions of its quarterly growth figures for this year and the 2020-2022 period. The National Statistics Institute (INE) reported that Spain's GDP grew by 0.6% in the first quarter of this year and 0.5% in the second quarter, exceeding initial estimates. Furthermore, second-quarter growth on a year-on-year basis was revised to 2.2%, up from 1.8%. These figures highlight Spain's ability to weather the challenges posed by interest rate hikes and inflation, positioning it favorably within the euro zone.

Asia

In recent developments aimed at improving diplomatic and economic relations between Washington and Beijing, two working groups have been established to address economic and financial matters. U.S. Treasury Secretary Janet Yellen and her Chinese counterpart, Vice-Premier He Lifeng, will oversee these groups, a significant move following Yellen's visit to Beijing for discussions with top Chinese economic officials. Yellen emphasized the importance of these groups, which build upon her July visit, as a significant step forward in the bilateral relationship. Their primary purpose is to serve as forums for communication, enabling both countries to express their interests and concerns while fostering healthy economic competition between the two rivals.

Meanwhile, China's recent curbs on exports of essential rare minerals for semiconductor manufacturing have raised eyebrows in the global tech industry. In August, China's exports of gallium and germanium, vital components for semiconductors, dropped to zero due to national security concerns. This move reflects China's willingness to respond to U.S. export controls in the ongoing tech war, even at the risk of economic growth concerns.

In India, rising oil prices have stirred economic concerns. However, the nation's economic outlook remains positive, thanks to better September monsoons and a decline in the prices of key food items. India, as the world's third-largest energy importer, is closely monitoring oil price fluctuations, particularly as they rose to 10-month highs earlier in the week. These increases have been attributed to extended production cuts from major suppliers Saudi Arabia and Russia. While oil prices are a point of concern, India's economic prospects appear optimistic, fueled by these positive developments in agriculture and food prices.

Turning our attention to Japan, the country is navigating a unique economic landscape characterized by a depreciating yen and rising 10-year bond yields. The yen has hit a 148-year low against the U.S. dollar, with potential consequences for the Japanese economy. While a weaker yen can benefit Japanese exporters by enhancing global competitiveness, it also raises concerns about higher import costs, potentially fueling inflation and affecting those with foreign currency holdings or debts. Concurrently, the 10-year Japanese government bond yield has reached its highest level since 2013, signaling investor demand for higher returns on these securities. This may reflect concerns about Japan's fiscal health, expectations of future inflation, or anticipation of tighter monetary policy.

[Disclaimer: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. Consult with a qualified financial professional before making any investment decisions.]