The message is clear – FED maintains restrictive monetary policy

Summer market rally lost its steam
Jackson Hole symposium brought hawkish message from the Fed

Financial markets’ price development

The first half of August was positive for equity markets, but after Federal Reserve Chair Jerome Powell speech about future monetary policy steps, markets turned around. The US S&P 500 index (S&P 500 Total Return EUR Index), which represents major 500 US companies decreased by 2.71 % during the month. Similar results were showed by developed markets (MSCI World Total Return EUR Index) which also decreased by 2.84 %. Same as last month emerging markets outperformed developed markets and managed to generate positive 1.83 % return (MSCI Emerging Markets Daily Net Total Return EUR Index).

The August started with geopolitical headwinds in Asia, when US White House speaker Nancy Pelosi decided to visit Taiwan showing commitment and support to the region despite China’s objections. This visit was the highest‑ranking US official in a quarter of century. The US official’s trip was not welcomed by China. Immediately, China announced trade sanctions to Taiwan and started its most provocative military drills around the island. Also, Chinese president Xi Jinping sent a political message to US president Joe Biden not to play with the fire showing his rage. China declared that Taiwan is a rebellion part of it and one day it will be brought back even with force if necessary. Markets followed these geopolitical developments, but it did not have a greater effect on the market prices.

Earlier in August developed markets continued to increase following market trend which started in mid‑June. The market sentiment was bolstered by the shift from better‑than‑expected earnings to better‑than‑expected economic data. Markets moved upward after consumer pricing and manufacturing data indicated that inflation may cool down and it would allow US Federal Reserve Bank to ease monetary policy. The main US market index S&P 500 which represents the biggest 500 US companies managed to recoup more than 50 % of the losses between January peak and mid‑June bottom. After this bounce back market participants started arguing if it was the beginning of new bull market or just a bear market rally.

Implied Overnight Rate & Number of Hikes/Cuts

Source: Bloomberg L.P.

The main market event for the financial markets was Jackson Hole economic symposium on 26^th of August which is attended by central bankers, finance ministers, academics, and financial market participants from all around the world. After the symposium FED chairman Jerome Powell during the press conference sent clear message to the market that the main goal for central bank is to restore price stability which requires to maintain restrictive monetary policy. He warned market participants that keeping restrictive monetary policy could be painful for households and businesses, but not as painful as living in the elevated inflation environment. It was clear signal for the market and market indices turned around immediately confirming that the two‑month long summer rally could have been just a bear market rally.

“House view” update

Luminor Investment management team decided to maintain lowered risk allocation budget and higher exposure to defensive sectors (utilities, energy, and consumer staples). High uncertainty about possible consequences of the war in Ukraine, tightening monetary policy, high volatility in the markets and slowed economic growth warrant such decision.

DISCLAIMER

Warnings:

This Marketing Communication is not considered investment research and has not been prepared in accordance with standards applicable to independent investment research.
This Marketing Communication does not limit or prohibit the bank or any of its employees from dealing prior to its dissemination.

Origin of the Marketing Communication

This Marketing Communication originates from Portfolio Management unit (hereinafter referred to as PMU) – a division of Luminor Bank AS (reg. No 11315936, with registered address at Liivalaia 45, 10145, Tallinn, Republic of Estonia, hereinafter - Luminor). PMU is involved in the provision of discretionary portfolio management services to Luminor clients.

Supervisory authority

As a credit institution Luminor is subject to supervision by the Estonian financial supervision and resolution authority (Finantsinspektsioon). Additionally, Luminor is subject to supervision by the European Central Bank (ECB), which undertakes such supervision within the Single Supervisory Mechanism (SSM), which consists of the ECB and the national responsible authorities (Council Regulation (EU) No 1024/2013 - SSM Regulation). Unless set out herein explicitly otherwise, references to legal norms refer to norms enacted by the Republic of Estonia.
Content and source of the publication

This Marketing Communication has been prepared by PMU for information purposes. Luminor will not consider recipients of this Communication as its clients and accepts no liability for use by them of the contents, which may not be suitable for their personal use.

Opinions of PMU may deviate from recommendations or opinions presented by the Luminor Markets unit. The reason may typically be the result of differing investment horizons, using specific methodologies, taking into consideration personal circumstances, applying a specific risk assessment, portfolio considerations or other factors. Opinions, price targets and calculations are based on one or more methods of valuation, for instance cash ﬂow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation, interest rate forecasts, currency forecasts and investment horizon.

Luminor uses public sources that it believes to be reliable. However, Luminor has not performed independent verification. Luminor makes no guarantee, representation or warranty as to their accuracy or completeness. All investments entail a risk and may result in both profits and losses.

This Marketing Communication constitutes neither a solicitation of an offer nor a prospectus in the sense of applicable laws. An investment decision in respect of a financial instrument, a financial product or an investment (all hereinafter “product”) must be made on the basis of an approved, published prospectus or the complete documentation for such a product in question and not on the basis of this document. Neither this document nor any of its components shall form the basis for any kind of contract or commitment whatsoever. This document is not a substitute for the necessary advice on the purchase or sale of a financial instrument or a financial product.

No Advice

This Marketing Communication has been prepared by Luminor PMU as general information and shall not be construed as the sole basis for an investment decision. It is not intended as a personal recommendation of particular ﬁnancial instruments or strategies. Luminor accepts no liability for the use of the Marketing Communication content by its recipients.

If this Marketing Communication contains recommendations, those recommendations shall not be considered as an objective or independent explanation of the matters discussed herein. This document does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the persons who receive it. The securities or other financial instruments discussed herein may not be suitable for all investors. The investor bears all risk of loss in connection with an investment. Luminor recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors if they believe it necessary.

The information contained in this document also does not constitute advice on the tax consequences of making any particular investment decision. The estimates of costs and charges related to specific investment products are not provided therein. Each investor shall make his/her own appraisal of the tax and other ﬁnancial advantages and disadvantages of his/her investment.

Risk information

The risk of investing in certain ﬁnancial instruments, including those mentioned in this document, is generally high, as their market value is exposed to many different factors. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. When investing in individual ﬁnancial instruments the investor may lose all or part of their investments.

Important disclosures of risks regarding investment products and investment services are available here.

Conflicts of interest

To avoid occurrence of potential conﬂicts of interest as well as to manage personal account dealing and / or insider trading, the employees of Luminor are subject to the internal rules on sound ethical conduct, management of inside information, and handling of unpublished research material and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. Luminor’s Remuneration Policy establishes no link between revenues from capital markets activity and remuneration of individual employees.

The availability of this Marketing Communication is not associated with the amount of executed transactions or volume thereof.

This material has been prepared following the Luminor Conﬂict of Interest Policy, which may be viewed here.

Distribution

This Marketing Communication may not be transmitted to, or distributed within, the United States of America or Canada or their respective territories or possessions, nor may it be distributed to any U.S. person or any person resident in Canada. The document may not be duplicated, reproduced and(or) distributed without Luminor’s prior written consent.