Daily Report (August 31, 2022)
Market Recap and Analysis
Markets were quite weak overall with communications services sector only closing very slightly green (pretty much flat). We are seeing further downside momentum due to CTA’s being short as well as market makers selling as we are in negative gamma territory. I don’t necessarily see us making new lows unless we have some sort of new catalyst but there will likely be alot of volatility next few weeks with risk events ahead.
The US escalated geopolitical tensions which means supply side inflation will stay stickier. There is now a ban on companies selling AI chips to China and Russia as the tensions heighten.
From Aswath Damodaran: The risk-free rate rose from 1.31% to 3.19% y/y and the ERP increased from 4.21% to 5.45% respectively. When the yields rise that pushes the risk free rate higher which makes the cost of borrowing more expensive for companies. As a result it lowers companies valuations as earnings suffer and more so for higher debt and less profitable companies. In this case companies with pricing power perform better. You can think of ERP as risk in the equities markets. There is higher expected return as a result of the higher risk involved.
There are concerns about whether or not we can achieve a soft landing and how long will the inflation rate will remain elevated appeared. As a result in the last few days, we have been seeing risk aversion. Perhaps many investors have underestimated the damage potential of inflation while overestimating the effectiveness of the Fed dealing with such issue.
