 Good morning and welcome to this week's weekly market update with me Michael Houston on Friday, the 2nd of September as we look ahead to the week beginning the 5th of September. Now last week's Jackson Hole speech by Powell appeared to provide the reset that I more or less expected when it came to the Fed's determination to drive down inflation. I talked about it in my video last week. It's also reset market expectations around whether to expect rate cuts next year and not in a good way, given the reaction of bond markets this week. So where does that leave us? Well, yields have surged as markets start to price in higher for longer. As I suggested might happen in last week's update. Stock markets have had a dreadful week with the DAX back at July levels and US markets looking soft against a backdrop of resilient economic data. This data resilience is a double-edged sword for US markets because while it is welcome news that the US economy is holding up well. It also makes it much more likely the Fed will more aggressive will move more aggressively on monetary policy because they feel they have the headroom to do so. So essentially good news is bad news because it drives yields up and exerts much more downside on equity markets in general. Now this belief of a more aggressive Fed is driving the US dollar higher to 24 year highs against the yen and 20 year peaks against the basket of currencies. So does that mean that we have further to go? Well, if you actually look at the alternatives, the answer is yes. Not again has gone through 140 and slightly to probably move to 145 and perhaps even as high as 150. Euro dollars managed to hold up fairly well around about 99. It's still holding above 99. But the pound has continued to weaken and it sort of brings us ever closer to those pandemic lows of 1410. It also means that the likes of the European Central Bank and other central banks are likely to have to hike more aggressively. The central bank has doubled down on a policy that is likely to have profoundly negative impacts on economic activity over the course of the rest of the year. Central bankers have belatedly realized that they are woefully behind the curve on rate hikes. And while the Fed is in an aggressive titling mode, they have little choice to follow suit, given the cost of not acting is a lower currency and higher imported inflation. So that brings us on to what we're looking ahead to this week. Obviously, we have an ECB rate meeting. We also have an RBA rate meeting and we have a Bank of Canada rate meeting and we're expecting sizeable rate hikes from all of them. Before we get on to that, let's look at the declines that we've seen in equity markets this week starting with the DAX. Now last week I talked about the downside being the predominant side and ultimately that still remains the case. We've seen big declines this week. We've retested towards the lower end of the recent ranges for the DAX. The big support level is around about the 12,400 level. That remains the next key support area now that we're back below 13,100. If we look at the S&P 500, again, it's a similar sort of story. We've dropped below that support level of last week of around about 4,000. We're now looking to retest that trend line support from the June lows. So that's the next key support level there. Yesterday's small hammer might suggest that we've heard a bit of a short. So we could see a modest rebound as we look ahead to today's US payrolls report. That's going to be a key bellwether in terms of whether or not to expect the 75 basis point rate hike from the Federal Reserve at the September meeting. I think it's unlikely that even a poor payroll report, payrolls report, will deter the Fed from going down a 75 basis point rate hike in September. I think the key data will be the CPI numbers which occur during the blackout period for the Federal Reserve. It's probably less about the headline number on today's payrolls report than it is about wages and the participation rate. And we saw earlier this week the return of the ADP payrolls report. It was a fairly low headline number of 128,000. But what we saw when we actually dig into the data was that wage growth was around about 7.6% for positions which were fairly constant. And if you actually moved jobs, you could expect an average pay rise of around about 15% or 16%. So I think the Fed will be concerned about that and they're likely to want to try and get ahead of the curve or front load. And let's not forget there's only three more rate meetings between now and the end of the year. So if you're looking to get the Fed funds rate to around about 4% by year end, you've still got another 150 basis points to go between now and then, which suggests at the very least we're going to get 50 in September and potentially 75 depending on the quality of the data between now and then. My base case is for probably 75, but we certainly won't get less than 50. So let's look at that. We've also shouldn't forget that the Federal Reserve is also doing quantitative tightening, starting in quantitative tightening this month to the tune of $95 billion a month up from $45 in August. So again, that's going to be a key determinant of how tighter monetary policy is likely to be going forward. So that's the S&P and that's the Germany 40 or the DAX. We've seen a big fall in the FTSE 100, certainly stark move here. That was last Friday, obviously in the aftermath of the Powell speech, Tuesday, Wednesday, Thursday, and obviously this is today's price action thus far. So there's certainly potential for us to fall a little bit further given these lows back in July. So we still remain very much in a range when it comes to the FTSE 100, but certainly I think the dynamic has shifted when it comes to what to expect when it comes in terms of monetary policy. What we've seen also this week is a big move in the US dollar. The biggest losses have been, as you can see against the Norwegian Kroner largely as a consequence of the decline in the oil price. But obviously the yen has been a big loser has has been the pound and the Australian dollar the euro rather counterintuitively is actually held up fairly well. And I think that's on the basis of the fact that we've got an ECB rate meeting this week or this coming week on the 8th of September. People are talking about a jumbo rate hike this week of 75 basis points on top of the 50 that we saw in July. And let's not forget where the ECB policy rate is. It's a zero. So even a jumbo in inverted commas 75 basis point rate hike still puts the ECB well behind the curve when it comes to other central banks. I think the jury is out on how aggressive the ECB can actually be when it comes to rate hikes. And the reason for that is this chart here. This is the Italian tenure yield. And it's retested at 4% level and also spreads between Italian tenure yields and German tenure yields have moved back above 240 basis points. Now if we move beyond 250 basis points that's going to make the ECB incredibly nervous. We still don't know how the eligibility of each individual member country for TPI implementation is likely to work. That's the transmission protection instrument that Madame Lagarde announced at the July meeting. We did manage to establish that all of the country any country that looks to benefit from the transmission protection instrument must comply with EU fiscal rules. It must have fiscal and debt sustainability, sound and sustainable macro policies, and an absence of severe macro imbalances. Well on any measure there's no way Italy complies with all of these. In fact, any of them. Now that's a problem because if it did it wouldn't need to use TPI because the market would have confidence in its ability to manage its debt pile, which is 150% of GDP. So I think the bigger problem for the ECB is likely to come when the market tries to push Italian tenure yields back above 4%. We've already seen them try this week. I think over the course of the next few months we'll find out whether TPI has any teeth or there is just simple jaw boning because I can't imagine that the Bundesbank or the German constitutional court will allow the ECB to buy Italian bonds and drive yields down without any trade-off in terms of fiscal reform. So that's the big question. And also we can't forget that Italy has elections later this month as they look to elect a brand new government. So there's an awful lot of political risk surrounding the euro area, which sort of makes me scratch my head a little bit when it comes to the fact as to why the euro is so strong. Be that as it may, I say so strong, it hasn't fallen anywhere near as much as the pound has. I mean, the pound's got its problems. There's no doubt about that. But so is the euro area. Having said that, we're still very much in the downtrend that we've been in since the beginning of the year. We're finding a little bit of a base at around about 99, but we are struggling to rally much above 1.0.1.20. And even if we do break above 1.0.1.20, we've got resistance at the 50-day moving average and the downtrend line here. We still remain very much on target for my longer term move towards 96.20. This is essentially where we are. This is the triangle breakout that I identified back in April. We still remain very much tilted towards the downside. And that's essentially why I still think the dollar has further room to go to the upside. So what does that mean for risk assets? Well, it suggests that risk assets are likely to face enormous challenges going forward. As for the pound, well, you know, there's no way around it. This looks ugly. The next key chart point is this 1.14.10 area, which I've highlighted back here, March 2020 lows. Below that, pretty much there's fresh air between the 1.14.10 area that we saw post-lockdown March 2020. And the all-time lows that we saw back in 1985 when the pound traded as low as 1.03.50 against the dollar. So, you know, we're back very close to parity territory. And I never thought that I would actually say that when it comes to the pound. Now, on Monday, we will finally find out who the UK Prime Minister is. And he or she, it's probably going to be a she, will find that they've got a huge inbox of problems. We already know what the new energy price cap will be, £3,549, give or take the old pound. And that is going to present enormous problems for UK consumers who aren't on a fixed-rate energy tariff. We're already seeing the effects of it in the headline inflation numbers, 10.1%. Food and energy is trending higher at around about 10% a year. That is going to present problems for not only consumer confidence, which is already a record lows, but for retailers more broadly. And that's why we've seen such a big sell-off this week in consumer discretionaries. We are looking at very much not only are we suffering from a summer of discontent, but we could well be heading for another winter of discontent, around 1979, unless the new government gets a grip, not only on the economy, but also on a fiscal response, short-term and long-term, when it comes to managing the problems of the UK over the course of the rest of the term. So, pound is looking a little bit soft, potential for further downside towards these lows, around about 114.20%. We do not want to see a break below these lows, because that is going to compound the problems for the Bank of England when it comes to try and get on top of the inflation problem that the UK is suffering quite uniquely from in terms of the headline number. If you look at PPI, we still remain very, very much below the levels that we're seeing in Europe in Italy. We saw an annualised number of 46% in the July numbers released earlier this week, and even German PPI is well above that. So, it's not just a UK problem, it's a European problem. And if Putin cuts off Nord Stream 1, then we're in a whole world of winter pay. In terms of the RBA and the Bank of Canada, we're expecting 50 basis point rate hike from the RBA. We've already seen a slide in the Australian dollar over the course of the past few days, very much a dollar move, but also in terms of concerns about the Chinese economy. China trade numbers on the 7th of September, these are not likely to be particularly good earlier this week. The Chinese authorities locked down Chengdu, 21.5 million people on the back of a number of a handful of COVID infections, and we haven't even got into winter yet. So, the prospect of a recovery in the Chinese economy is now probably much tilted between zero and none over the course of the rest of the year, unless China drops zero COVID policy, then the Chinese economy is in a world of pain when it comes to the potential for any type of economic growth over the course of the rest of the six months. So, that five, five and a half percent target, it's for the birds now. I think China will be lucky to even grow by half that amount, given the problems that they already have, not only with respect to internal demand, but also their property sector. They are now 146 billion dollars of stimulus a couple of weeks ago. That's not even going to touch the sides in terms of any economic rebound. We've also got Dollar Cat, the Bank of Canada. Canada's weakened quite substantially. Again, we saw a bumper rate hike from the Bank of Canada at the last meeting in July, 100 basis points rate move. We can see that basically hasn't had any effect whatsoever because it's getting swapped up in a dollar tsunami. So, again, we're probably going to see 75 basis points on top of the 100. Will that call a top in Dollar Cat? Well, we do appear to be finding a little bit of a top at around about these peaks here. The big question is whether or not we continue to hold that line or whether or not we move back to the highs that we saw in October 2020, or the lows in the case of Canada are around about 134. But 132 does appear to be capping those gains in the US dollar against the Canadian dollar in the short to medium term. What else have we got? So we talked about China trade, we've talked about RBA, we talked about the Bank of Canada, we talked about the ECB. A couple of corporate events that might be of interest. We've got the latest Apple event on the 7th of September. They've held these events every year since 2012. They're usually a fairly decent indicator of what's coming up. In what is historically been Apple's strongest quarter in terms of revenues, the pre Thanksgiving, pre Christmas quarter. What are we expecting? Well, you know, that's a big question. Every year Apple rolls out a series of new updates. And this year's pre Christmas trading period is likely to be its most challenging yet, given the current economic backdrop, not only in Europe and the US, but also in China. I mean, when you consider that it offered discounts in its highest spec iPhone 13 in China earlier this year, that would appear to suggest they expect to find the outlook to be challenging going forward. So what can we expect? Well, we're expecting a new iPhone 14 and you watch some new iPad models. And all of these are expected to be powered by new upgraded chipset, longer lasting batteries, more powerful cameras. The new iPad models were expecting potentially a new iPad mini and a new iPad pro. So will they be enough to arrest the big declines that we've seen over the course of the past few days? One of the things I will say about Apple, you know, it is it is a cash machine when it comes to generating revenue. The bigger question is, will it continue to be so as we look ahead to this week's product update? Also got numbers from Dark Trace. The shares have seen a fairly decent rebound in the last few weeks. That spike there was on the back of speculation that private equity fund Tom Abravo might be interested in taking it private. No figure has been attributed to the discussion. So it's hard to say what sort of number would cause Dark Trace to basically come off a public listing, but they only recently IPOed. To my mind, why would they want to go private? I mean, Tom Abravo does have an interest in this area. It bought out Sophos antivirus and took that private. And ultimately, the opinion is split, I think, in terms of Dark Trace on the sustainability of its business model. But if you look at the numbers and you look at the four year numbers that are going to be coming out this week, total total customers have been on the rise up at 7400 recurring revenues have risen between 31 and 34 percent against the backdrop of the Russian invasion of Ukraine. The demand for cybersecurity AI hasn't been higher and it's likely to continue to improve. So why would you not look to want to ride up on the back of that? So it'll be an interesting update for Dark Trace. We've also got Barrett Developments, UK house builders. You know, demand has still continued to hold up fairly recently yet. Look at look at the look at the performance years of date of UK house builders. It's not just Barrett here, mind you. We're also talking about person Taylor Wimpy. It's been one way traffic on the basis of the fact that markets are pricing in a pretty bleak picture when it comes to house prices over the course of the next 12 to 18 months. And yet demand continues to remain fairly resilient despite a rising interest rate environment. So that's all begs the question. How much of it is already priced in this was pre COVID. This was post COVID. This is where we are now. So, you know, when you look at the dividend yield on these, these, these companies, it's fairly healthy. The bigger question is whether or not they can actually fulfill their forward order books going forward. Last but not least, we've got GameStop. It's latest numbers for Q2 and Q1. They posted a whopping great big loss of $157.9 million. Revenues were better by $1.38 billion. But it was notable that sales of hardware, including games consoles, saw a fall from earlier this from a year earlier. So that highlights the challenges facing the industry. Certainly Microsoft said that its game sales and console sales slowed. So that would suggest to me that even though GameStop is a memestock, the outlook in terms of revenues at a time when cost of living is facing increasing challenges is likely to be a challenge for the company. Now, as last update, the company said it plan to launch a non fungible token marketplace by the end of this quarter. Well, this looks at all order given the recent implosion in this area in the last few months. The market has collapsed essentially on the back of the tightening monetary policy environment laid out by the Fed. Why would you invest in a memestock or growth stock when you've got a economy that is probably looking to slow down quite markedly? So I would suggest downside risks here are for a move back to $20 when GameStop reports later this week. Okay, so this is basically where we are in terms of this week's weekly market update. Once again, thanks very much for listening. Hope you all have a great weekend and hope to speak to you all same time next week. Thanks very much for listening.