Talking Points This Week: Apple, Rate Hikes And Drop In Demand

Apple Inc. was in the spotlight this week, with the world's premier consumer tech company unveiling the new Apple Watch (Series 8), AirPods Pro and the new iPhone 14 and iPhone 14 Plus.

Crash detection was a standout feature in the watch and the phone, as was satellite connectivity for emergency situations in the phone.

But this was not necessarily the biggest development this week, even though it was more tracked than nine central banks acting on interest rates, and the energy crisis in Europe becoming even more pronounced. More rate hikes seem a given, and growth pangs now become a certainty. Read on...

Rate Hikes

Central banks of Australia and Chile hiked rates. While the Chilean hike of 100 basis points was a surprise, the Bank of Canada and the European Central Bank raised rates by 75 basis points each.

Such monetary fireworks are just the start of what’s likely to be a crucial month for global policy. Later in September, the U.S. Federal Reserve will meet, with another rate hike of at least half a point the likely outcome.

To a lot of people, the job of the Fed looks way simpler compared to what the ECB has to deal with. And the ECB policymakers, whose rate-hiking cycle has only just begun, are bracing for a possible contraction in the Eurozone as the aftermath of the Russian gas shutoff menaces the economy.

Russia Hikes Troubles For EU

Winter is almost here, and it promises to be a long one. Natural gas flows to Europe through the Nord Stream 1 pipeline have been indefinitely suspended, exacerbating the squeeze on Europe’s energy supplies and deepening the recession risks faced in the EU.

The direct and indirect fallout are already being seen. Gazprom said the suspension was due to a technical fault, but curiously the move came hours after the G7 countries said they were pushing ahead with a plan to impose a price cap on Russia’s oil exports.

And this was followed by statements from Russian President Vladimir Putin warning to cut off energy supplies if price caps are imposed on Russia's oil and gas exports.

Oil Is Not Gas

Oil tumbled to the lowest since January as a dollar surge and global demand concerns weigh on prices despite the threat of disruption to Russian supplies.

With central banks jacking up rates to quell inflation, investors are concerned economies may be tipped into recession.

In China, strict virus curbs are damping demand, and the fear around demand is so prevalent that prices erased a gain driven by a decision by the Organization of Petroleum Exporting Countries and its allies on Monday to pare output.

Reflecting the softness, Saudi Arabia reduced prices for customers in Asia and Europe for next month’s shipments. It seems to be evident that energy traders appear to be skeptical of any rallies as they digest a plethora of global economic challenges.

And judging by the costs of power, European demand in general may cease to be closer to averages in the next few months, as inflation eats into the spending power of the continent. Oil has a challenge at hand, for sure.

Rising Optimism On The India Story Warranted?

The jury is out on this one. Decoupling is a loudly spoken fable. As Maneesh Dangi of Macro Mosaic says in his LinkedIn post, this tape has run before in equities (1992, 1994, 2007 and 2014), bonds (2003 and 2021) and currency (2007, 2012, 2017 and 2021) and to no good end.

History points to why it should not be believed in. In fact, while EM equities continue to trade 'relatively' well versus developed peers', it is very unusual in down markets. The last year that DM fell by more than 20% (2008: -42%), EM fell by 54%.

However, history may not have pointed to how resilient Indian markets would be in the event of more than $25 billion of FII outflows. Nor would history have predicted equities at near highs in a year of higher crude prices, geopolitics and snarled supply chains.

And proponents of the 'decoupled this time for sure' theory have some arguments of their own—notably retail flows, China plus one, probable inclusion in global bond indices and effect of past reforms.

The opinions vary significantly. However, when one sees the prices and the resilience of the markets, it seems that Mr. Market is telling everyone that the future is not as tough as is being envisaged.

However, there is enough opinion out there to make one believe otherwise, and it is easy to argue for or against either of the opposing opinions.

Choose which side of the bread you want to butter wisely, for this is not about just one meal, but arguably about having a feast or missing it entirely.

Niraj Shah is executive editor at BQ Prime.