Three central banks, OPEC headline a big week of market risks

Charts and Caffeine

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

  • S&P 500 - 3,924 (-1.07%)
  • NASDAQ - 11,631 (-1.31%)
  • CBOE VIX - 25.47
  • US 10YR - 3.199%
  • USD INDEX - 109.61

The US jobs report came in as expected, bar the unemployment rate which climbed due to more people returning to the labour force. What's interesting here is that post-report drop, US equity futures turned positive but throughout the day, that rally faded into a splat.

  • FTSE 100 - 7,281 (+1.86%)
  • STOXX 600 - 415.97 (+2.04%)
  • UK 10YR - 2.916%
  • EUR/USD - 0.9957
  • GOLD - US$1,723/oz
  • WTI CRUDE - US$87.25/bbl
  • DALIAN IRON ORE - US$95.55/T

THE CALENDAR

(Source: Forex Factory)

Yay, big macro's back on the docket after a month in the (proverbial) dust! The week is headlined by not one but three central bank meetings - the RBA, the ECB, and the BoC are all handing down interest rate decisions this week. And each is interesting for its own reason.

Here, the RBA is expected to go another 50 basis points. That would take the cash rate to 2.35%, and far more importantly, make it four on the trot. While some analysts are already saying the rate hikes will crash the economy, others say their job isn't done until at least the end of the year. 

In Frankfurt, all eyes are on the ECB - and whether it has basically no choice but to pull the pin on a 75 basis point rate hike. We wrote about that in the wrap last week. Imagine that - they're only doing mega-hikes when inflation's already nearly 10%. 

The Bank of Canada is also likely to go another 75 basis points itself, but the question is now whether an interest rate with a 3-handle is "restrictive" (Read: It may be time to pause for a while.) The only chink in their proverbial armour is the fact that Canadian inflation is still at 7.6%. So if they want to pause in a few months' time, that will highly be dependent on inflation continuing to cool. 

Beyond all that, Q2 GDP here in Australia, PMIs in the US, and the latest OPEC+ meetings headline what will be a humongous week. 

THE CHART

Source: Twitter/@MikeZaccardi

If you don't think earnings multiples have a long way to fall, here's a chart that may burst your bubble. This chart is the earnings multiple of the S&P 500 - but not as you know it. The grey line is the S&P 490 (i.e. the bottom 490 companies of the index) and the green line is the S&P 10 (i.e. the 10 largest companies of the index). If you took out the green line, the S&P 500's P/E multiple is a healthy 14.6 times earnings - near the historical mean of 15.97 (per this website). Factoring in the top 10, the index's earnings multiple is still well above this said mean. 

Conclusion? Concentration risk is very alive and well. 

THE STAT

19.4%: The year-to-date losses of the US 60/40 portfolio deepened further in August. The once-model portfolio for diversification is now staring down the barrel of the worst year since 1936. (Source: Bank of America)

In other news: ex-US equities fared better than the US, WTI crude oil fell nearly 10%, and the US Dollar increased by nearly 3%... and that was just last month! The falls are so severe that BofA now has an end-of-year target for the S&P 500 of 3600. 

Full disclaimer here: I'm not the biggest fan of S&P 500 year-end targets, but I am interested in how estimates change over the course of the year as the bulls became bears and the bears have been getting louder. 

TODAY'S TOP READ

He Reshaped Lysol’s Parent Company. Meet the Outsider Who’s Taking Over Starbucks. (WSJ): A nice profile here of the man taking over Starbucks from interim/former CEO Howard Schultz. He's lived and traveled far and wide. Now, he has to navigate increased costs, staff unionisation, and a Chinese business beholden to the government's zero-COVID strategy.

STOCKS TO WATCH

Now that August reporting season is over, the very last of the broker reports are coming through - and one of those is the Goldman Sachs report card on REITs. 

When it comes to the outlook, Goldmans' average EPS/funds from operations guidance growth came in around 6%. Distributions were only up marginally as well, which must go some way to explaining what a rising rate environment is doing to corporate mentality in this sector. Analysts also note there has been a focus on debt hedging, which again is a sign of just how uncertain the macro environment is right now.

When all is said and done, Goldmans only downgraded one stock - Vicinity Centres (ASX: VCX) to neutral from buy and that was on valuation grounds. Just two REITs of the 11 in its wheelhouse are sell-rated.

And a piece of late mail, courtesy of FNArena's Rudi Filapek-Vandyck. Late Friday, JP Morgan made three changes to its model portfolio post-earnings. Cleanaway (ASX: CWY) was added, WiseTech (ASX: WTC) was accumulated, and IGO (ASX: IGO) was shipped into the old spot held by Allkem (ASX: AKE).

Today's report was written by Hans Lee.


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Charts and Caffeine
Markets Wrap
Livewire Markets

Charts and Caffeine is Livewire's daily pre-market wrap. We get you across the overnight markets and share the best in global finance so you can start your day on the front foot. Written by Hans Lee (Mondays - Thursdays) and Chris Conway (Fridays).

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