Markets Wrap (29 August – 11 September)

Stocks
The S&P 500 index is 5.5% below its August high, but relative to the rest of the world, the US market is seen as the most attractive destination when it comes to stocks (Chart 1) even despite significantly higher valuations (S&P 500 P/E ratio currently stands at 19.4 versus 12.2 of MSCI World ex. US). 

Bonds
Bonds are now officially in a bear market – the Bloomberg Global Aggregate bond index has fallen more than 20% from the previous high reached in May 2021 (Chart 2).

Central banks
The ECB, as expected, hiked key rates by 75 bps (based on interest rate futures, the probability for this move before the September meeting was priced at 75%, versus 25% for a smaller 50 bps hike), confirming the market’s view that the bank is well behind the curve on tackling a record level of inflation; price growth in the euro area continues to be largely determined by soaring food and energy prices (Chart 3) in contrast to the US, where strong demand is the deciding factor (Chart 4).
Bloomberg quoted unidentified internal ECB sources saying that the Governing Council members will support another 75 bps hike if the pace of inflation keeps exceeding expectations.
Before the FED will enter a blackout period ahead of its 20-21 September meeting, Vice Chair L. Brainard noted that interest rates will have to be raised to restrictive levels, whereas an economist L. Summers estimates that the US risks a 6% unemployment level (currently 3.7%) if inflation is to be brought back toward the 2% target. 
Traders expect a triple (75 bps) hike from the FED in September, which translates into a 3-3.25% interval – well above the neutral rate estimated at around 2.5%. 

FX
Supported by hawkish FED and heightened risk premiums, the USD remains on a firm uptrend versus a basket of ten leading global currencies, as indicated by the Bloomberg Dollar Spot Index, which is at the highest level since its very inception in 2005. 
EUR decline versus the USD has been accompanied by a significant spike in the size of exchange rate movements – the measures of realized as well as implied 1-month volatility are much lower compared with the peak of the Covid-19 crisis, but almost twice as high as at this time of the year in 2021 (Chart 5). 

Commodities
Gas prices in Europe surged as Russia is keeping a crucial pipeline closed for “maintenance” reasons, which Germany fears may be a permanent cut of supply; a megawatt hour of Dutch gas currently stands at almost EUR 200, which is equivalent to a price of USD 332 per barrel of Brent oil (Chart 6).