Weekly Update | August 18, 2023
It has been a productive week in the Frame Funds offices, market research and strategy development have been the primary focus.
Let’s hop straight into five of the biggest developments this week.
1. China slashed 1-y loan prime rates by 10 basis points
The PBOC cut short term loan rates in another effort to stimulate consumer spending. The 1-year loan prime rate fell to a record low of 3.45% from the previous level of 3.55%. The PBOC now faces a complicated balancing act of simultaneously stimulating consumer spending while propping up the battered Yuan.
2. US existing homes sales fell to 4.07m in July
The turmoil in the US real estate industry continued in July with a further 2% fall in sales of existing homes. The decline was worse than the 4.15m which was forecasted by the market, and a decline from the 4.16m in June. The housing sector is plagued with a massive glut in inventory at a time when price inflation and historically high interest rates have hit buyers.
3. German flash manufacturing PMI declined to 39.1
Manufacturing productivity in Germany continued to recede at the steepest rate since the height of the Covid-19 pandemic in May 2020. The minimal movement from the previous 38.9 only reinforced perception that the downturn is longstanding. An intricate combination of rampant inflation, waning demand and high interest rates are expected to further plague the sector.
4. UK flash services PMI falls to 48.7
The outlook for the critical British service sector deteriorated, marking the end of a six-month expansion. The 48.7 contraction was a sharp decline from the 51.5 expansion reported in July. Weak demand due to pessimistic consumer sentiment, high borrowing costs and inflation underlie the negative outlook.
5. US unemployment claims fall to 230k
The US labour market is stabilising after showing seasonal weaknesses in recent weeks. The receding unemployment claims are reinforcing confidence of a possible soft landing for the US as the global economy loses steam. From the previous 240k upward revision, the report fell to 230k, a much better posting than market expectations of 239k.
Below shows the performance of a range of futures markets we track. Some of these are included within the universe of our multi-strategy hedge fund.
Silver and gold rallied on stimulus news out of China with markets upbeat that the interest rates cut will enhance consumer spending but may also reignite further inflation. The VIX has held relatively stable over the course of the week as US equities have had a small bounce. Outside of this, it has been a quiet week when assessing these markets on a weekly basis, however over the course of the week, we have seen significant volatility from fixed income and energy markets due to hopes of a softer landing than expected.
The ASX has had another very mixed week, miners experienced solid performance as iron ore rebounded after the prime rate cut in China. The big 4 banks had another mixed week of performance, with nothing really driving price action either way. More defensive names, WOW, WES, CSL, RMD and TLS all experienced selling pressure once again as a rotation out of last year’s winners continued. GMG was outstanding for the week, after solid results.
Below shows our proprietary trend-following barometer which captures the number of futures contracts within our universe hitting new short and long-term trends.
*Historically there is a positive correlation between the number of constituents experiencing both short and long-term trends and the performance of the strategy.
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