Summer Euphoria Continues To Be Squeezed Out Amid Worries About Stubborn Inflation

(MENAFN- ValueWalk)
geralt / Pixabay

• Wall Street fall leads to losses in Asia and a weak start in Europe amid inflation worries
• Pound hovers around $1.16, at lows not seen since the start of the pandemic
• High vacancies and rebound in consumer confidence adds to expectations of tougher rate hikes in the US
• gas prices take a breather, falling back but they are still sky-high compared to a year ago.
• Worries about weakness in China's Economy continue with contraction in factory activity
• Reach newspaper journalists walk out while Royal Mail workers strike for a second day.
• Unilever faces greenwashing criticism as its ad for laundry detergent is banned over unsubstantiated claims.

Get The Full Walter Schloss Series in PDF

Get the entire 10-part series on Walter Schloss in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q2 2022 hedge fund letters, conferences and more

The summer euphoria continues to be squeezed out of the stock markets, as investors tread more carefully, anxious about the implications of a fast pace of hikes in interest rates . Another negative session on Wall Street spilled over into trading in Asia and there has been a lacklustre start for the FTSE 100 which fell back in early trade.

Value investors touted the outperformance of value stocks for several quarters, but it looks like growth names are starting to take over again. The latest data on 13F filings from hedge funds reveal that fund managers are rotating back to growth stocks amid the factor's outperformance. However, they remain more overweight than usual on value Read More

That's despite continued weakness in sterling, which would ordinarily help boost the internationally focused index. The pound is still trading only a notch above $1.16, at lows not seen since at the start of the pandemic amid worries about the worsening outlook for the UK economy.

With inflation already running at double digits and the latest forecast from Goldman Sachs indicating it could more than double to 22%, a winter of discontent is looming and already more workers have joined picket lines today.

In the US, there is a 'good news is bad news' scenario playing out. Signs that the economy is proving resilient are being taken as a signal that the Federal Reserve will pull out all the stops to bring inflation under control.

The fresh sell-off on the S&P 500 was sparked by data showing job vacancies were still rising. It's clear that the fight for workers continues and employers are still desperate to hire staff, indicating that there is still pumping demand in the economy despite efforts by policymakers to deflate it.

Consumer confidence also rose in August, with more Americans planning to take vacations, another indication that for now plenty of spending is on the cards. Central bank policymakers really have their work cut out to bring down demand-led inflation, even as other pressures like supply chain snarl ups and super high energy prices appear to be easing a little.

Gas prices are taking a breather from last week's painful climb, amid hopes a looming shortage won't be severe as expected. Germany revealed its gas storage facilities should be 85% full by September, a month earlier than its target.

The tumble in prices will be some relief for consumers facing devastating increases in energy bills , but it's a small fall given the huge jump there has been over the past year. UK natural gas traded on wholesale markets is still more than 250% higher than 12 months ago, coming in at 449 pence per therm, compared to 126 pence on 31 August 2021.

The price of a barrel of Brent crude oil is hovering around $100, as traders assess the darkening clouds over the global economy and the expectation of weaker demand. Worries have resurfaced about weakness in China, with the latest snapshot of activity showing all the hallmarks of an economy struggling to regain its footing.

The Purchasing Managers Index (PMI) revealed that manufacturing contracted for a second month in August, with slowing consumer demand denting orders. Beijing's strict zero-Covid policy is still causing a huge headache for factory owners given that sporadic outbreaks of the virus are met with strict containment measures, limiting movement and disrupting supply chains.

The summer of strikes continues in the UK, with newspaper workers the latest to walk out over a pay row. Amid the cost-of-living catastrophe, the clamour for higher wages will continue as employees face a bleak winter of frighteningly high energy bills, soaring grocery costs and mounting repayments for mortgages and loans. 

The National Union of Journalists, representing staff at Reach PLC (LON:RCH) rejected a salary increase of 3% saying it would not be enough to help them deal with the current crisis. The strike piles on the pressure for the newspaper publisher which has been facing some challenging market conditions given that traditional newspaper readers are a mature client base and the younger generation is proving a tough nut to crack.

Royal Mail PLC (LON:RMG) staff are also on the picket lines for the second day, with fresh walk outs planned for September. These strikes could hardly come at a worse time given the pandemic tailwinds for the group have dissipated and the outlook for e-commerce is bleaker.

Although the group says it hopes to navigate inflation with price hikes and efficiency improvements that relies on demand holding up and with the macro-economic environment continuing to deteriorate that may be wishful thinking.

Unilever plc (LON:ULVR)'s rap on the knuckles from the advertising standards authority over an ad for Persil washing liquid highlights the perils of overstating ESG credentials.

The company has been told the advertisement can't run again in its current form and has been warned that it has to ensure the basis of environmental claims was clear in future ads, and that such claims were based on the full lifecycle of the products.

It's a particularly bad own goal for the company, given that it's a laundry detergent which is now at the centre of a 'greenwashing' row.

It's not the first time chief executive Alan Jope has felt the heat about ESG claims at the company, with veteran investor Terry Smith accusing the company of being obsessed with sustainability credentials at the expense of the company's fundamentals.

Unilever has claimed it's all part of a policy to woo younger consumers who make brand choices based on environmental impacts, but by being exposed by the ASA for making unsubstantiated claims, this is one commercial decision that is likely to backfire.''

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

About us

Over 1.7 million clients trust us with £123.8 billion (as at 30 June 2022), making us the UK's number one platform for private investors. More than 98% of client activity is done through our digital channels and over 600,000 access our mobile app each month.

MENAFN01092022005205011743ID1104798444