The S&P 500 gained 1.1% on Monday, its fourth consecutive daily advance, marking the longest winning streak in more than two months.
CIO continues to advise investors to take a selective approach. (UBS)
The advance comes ahead of the release of the Consumer Price Index (CPI) reading for August, with many investors hoping that the data will provide further evidence that US inflation is receding.
European markets also got a boost on Monday following weekend news that Ukraine has regained a large area of its northeast territory from Russia. The 1.5% rise in the Euro Stoxx 50 was its third consecutive daily advance.
The move has kindled hopes that global stocks could be on the cusp of a more sustained rally, following a 9% slide in the MSCI All Country World index from a recent peak in mid-August.
But given continued uncertainty over monetary policy, geopolitical risks, and the macroeconomic outlook in China, we believe such optimism looks premature:
The Fed is not yet ready for a dovish pivot. The consensus forecast is for a 0.1% month-over-month decline in CPI for August, following a flat reading in July. The core reading, excluding food and energy, is expected to remain at 0.3%. This would provide some reassurance that inflation has passed its peak in the US.
However, various top Federal Reserve officials have made it clear that they will need to see a longer run of muted inflation readings—along with evidence of a cooling labor market—before softening their tone. We maintain our view that the Fed will raise rates by a further 100 basis points by year-end, with risks for more if inflation does not slow in line with our forecasts.
Ukraine’s successful counteroffensive increases pressure on Russia. Although European stocks were buoyed on Monday by news that Ukraine has regained some ground in the east of the country, the wider implications of this success are still up for debate. While the Pentagon lauded Ukraine’s progress, it also pointed out that it “continues to be a tough fight for the Ukrainians.”
Furthermore, Ukraine’s success has raised the potential for an escalation in the war. The Kremlin stated yesterday there were no prospects for peace talks at the moment. Russia may step up mobilization efforts, and worries persist that it may resort to unconventional weapons on the battlefield. It also retains the ability to increase the pressure on Ukraine’s allies on the economic front, for example by further curtailing remaining gas flows to Europe. We expect the war to continue without a ceasefire at least until winter.
China shows few signs of abandoning its economically harmful zero-COVID policy. Contrary to earlier expectations, China has persisted with its zero-COVID strategy in the second half, rolling out mobility curbs and lockdowns on a regular basis. The containment measures have intensified in recent days with areas near Beijing locked down, testing rules tightened, and domestic travel over the major holidays discouraged.
The city of Chengdu has also extended its lockdown for most of its 21 million residents. The revival of more stringent controls shows Beijing remains committed to its zero-COVID strategy. The longevity of these new measures will be important to gauge the downside impact on its economic growth.
So, we continue to advise investors to take a selective approach by investing in value, including energy and UK equities, adding defensives like healthcare, consumer staples, and the Swiss franc, as well as high grade bonds and quality income stocks.
Main contributors – Mark Haefele, Patricia Lui, Tilmann Kolb, Vincent Heaney, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report – Too early to get bullish on risk, 13 September 2022.
Reimagining the power of investing.
Connecting people for a better world.
As a firm providing wealth management services to clients, UBS Financial Services Inc. offers investment advisory services in its capacity as an SEC-registered investment adviser and brokerage services in its capacity as an SEC-registered broker-dealer. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that you understand the ways in which we conduct business, and that you carefully read the agreements and disclosures that we provide to you about the products or services we offer. For more information, please review client relationship summary provided at www.ubs.com/relationshipsummary, or ask your UBS Financial Advisor for a copy.
Products and services mentioned on these web pages may not be available for residents of certain nations. Please consult the sales restrictions relating to the service in question for further information. https://www.ubs.com
CIO GWM Disclaimer
© UBS 1998 – 2022. All rights reserved.
Wealth management services in the United States are provided by UBS Financial Services Inc., a registered investment advisor and broker-dealer offering securities, trading, brokerage and related products and services. Member SIPC. Member FINRA. UBS Financial Services Inc. is also registered as a Futures Commission Merchant (FCM) with the U.S. Commodity Futures Trading Commission (CFTC) and offers brokerage services related to the execution and clearing of on-exchange futures and options on futures products. Member NFA
Notice for Non-U.S. Investors. Notice for Non-Puerto Rico Investor. Order Routing Disclosure. Statement of Financial Condition (PDF). Statement of Financial Condition- UBS FSI of Puerto Rico (PDF). Best Execution Statement (PDF). Loan Disclosure Statement (PDF). Account Sweep Yields. Advisory & Brokerage Services. CFP Board’s Trademark Disclaimer. Important Information About Auction Rate Securities (Not for Puerto Rico). Futures Commission Merchant (FCM) Information for UBS Financial Services Inc. Disclosures.