IFX Market Report: Tuesday 16th August 2022

The United Kingdom’s unemployment rate remains at 3.8% as expected in July. Claimant count change were however somewhat disappointing with a -10.5k figure, less than half the anticipated figure of -32.0k for the month. The Average Earnings Index+ bonus for June on the other hand saw better results than anticipated with a 5.1% rise, but real levels of UK wages fell at the fastest rate for at least 20 years in Q2 as inflation remains twice as high as the growth of real wages. Indeed, real wages fell by -3% in the three months to June; the biggest decline since records began in 2001.

The ZEW economic sentiment index in Germany deteriorated a little more than expected in August (-55.3 points against -52.7 points expected) but the figure remains deep in bear market territory, as is the Eurozone ZEW economic sentiment at -54.9.

Analysts from BlackRock and Morgan Stanley are also saying that the stock market is “disconnected from reality”. Valuations in equities do not match the current economic and earning landscape according to Morgan Stanley, and the market’s views on earning is seen as “overly optimistic” by BlackRock. They argue that the market is expecting the Fed to pursue a more dovish stance now after July’s 8.5% inflation reading, which may be a sign of a slowdown of inflation in the United States. However, both remain adamant that such expectations are premature given the economic landscape.

In China, more and more businesses are going bankrupt as the real estate crisis continues. In the last two months, many homebuyers have refused to pay their mortgages due to delays in construction for the apartments they had paid for. The Chinese Communist Party cracked down severely on highly indebted companies like the Evergrande Group which defaulted last year, leaving the Chinese housing markets to completely lose confidence. Added to that, asset management companies, engineering firms, constructions firms, as well as steel producers are all types of businesses that will be, or are already, impacted by a troubled housing market. Real estate and construction represent about 14% of the Chinese GDP in 2021, and that poses a risk to the entire Chinese economy.

Cable saw the dollar strengthen yesterday. GBPUSD opened at 1.2133 and closed at 1.2054.

GBPEUR saw the euro weaken again yesterday. It opened at 1.1825 and closed at 1.1860.

EURUSD followed a similar trend with a -0.96% fall for the euro. The pair opened at 1.0263 and closed at 1.0160.

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