Thursday, 29 December 2022 / Published in Equities & Indices

As we head into the final trading days of 2022, the major U.S. stock indices closed lower by more than 1% on Wednesday following a broad selloff amid recession fear and hawkish Federal Reserve, and they are on track for their worst year since 2008.

Growing worries for an economic recession, record-high inflation, energy crisis, Ukraine war, Covid concerns in China, a stronger dollar, surging interest rates, and borrowing costs amid the hawkish central banks have removed the risk appetite from the market recently, pushing tech-heavy Nasdaq Composite down by 35% so far in the year, while the S&P 500 and Dow Jones are on track to lose 20.6% and 10% respectively.

Market reaction:

The Dow Jones index extended recent losses by 1.1% to 32,875, settling below the 33,000 key support level, heavily affected by losses in the largest market cap stock of Apple, on energies, and industrials.

The share of Apple, a bellwether for the overall market and a major influence on investor sentiment, led the broad sell-off, falling more than 3% to $126, posting a new 52-week low for a second day as iPhone supply disruption jitters persist amid labor shortages at Foxconn’s main production facility in Zhengzhou, China.

At the same time, the projections on iPhone shipments for 2022 and the first quarter of 2023 would be lower than previous estimates, deteriorating the revenue outlook for 2023.

The S&P 500 index fell 1.2% to 3,783, affected by significant losses in the energy sector as oil and natural gas prices slid, coupled with losses in airline and tourist sectors as the severe winter weather conditions canceled many flights and traveling during the busy-Christmas period.

Following the ongoing sell-off in tech and growth companies, tech-heavy Nasdaq Composite settled down by 1,5% yesterday, ahead of its worst year since 2008.

Nasdaq has lost nearly 35% so far this year as investors rotated out of rate-sensitive growth and tech stocks amid rising recession fears and surging interest rates.

Crude oil:

Both Brent and WTI crude oil prices fell further on Thursday morning, having lost more than 5% since topping on Tuesday on growing concerns that the surging Covid-19 cases in China could halt a recovery in petroleum demand growth for the world’s second-largest oil consumer.

Brent fell as low as $82/b on Thursday morning retreating from its monthly highs of $86/b hit on Tuesday, while U.S.-based WTI crude dropped to near $77/b, -2% so far on the day.

Friday, 23 December 2022 / Published in Equities & Indices

Global stocks closed lower on Thursday, after pulling back from session lows, on growing concerns that the stronger-than-expected U.S GDP and the resilient labor market would lead the Federal Reserve to keep hiking interest rates for longer than investors may have hoped to fight the four-decade record high inflation.

U.S. stocks extended losses yesterday and the U.S. dollar rebounded from monthly lows after an upward revision to U.S Q3 GDP for 3.2% annualized growth, above the previous estimate of 2.9%, underscoring U.S. economic resiliency amid the Fed’s battle against inflation.

While an upward revision of the GDP would normally be viewed as a positive catalyst for the markets, amid the Fed’s tightening phase it triggers market participants’ fear that the Fed’s funds target rate could rise higher and stay there longer than previously expected, raising the possibility of an economic contraction in 2023.

Market reaction:

The selling pressure on stocks resumed yesterday as economists and traders remained concerned that further monetary tightening from central banks around the world will push the economy into a recession.

Rate-sensitive and high-growth tech stocks led the losses on concerns for softening demand and the hawkish stance by Fed, with tech-heavy Nasdaq Composite settling 2,20% lower on Thursday, ahead of the third week of losses in a row.

Nasdaq Composite, Daily chart

The Dow Jones index dropped 349 points, or 1.05% to 33,027, after falling as much as 803 points earlier in the session, almost writing off the +1,5% gains on Wednesday after the better-than-expected earnings from Nike and FedEx.

The S&P 500 index declined 1.45% last night and is on track for a nearly 20% annual drop so far, which would be its biggest since the 2008 financial crisis.

With the end of December around the corner, Dow Jones is down 4.5% on the month so far, while the S&P 500 and Nasdaq have tumbled 6.3% and 8.7%, respectively.

All three major averages are lined up to break a 3-year win streak and post their worst yearly performance since 2008, driven by the recession fears and the aggressive tightening and rate hiking by Fed to curb the inflationary pressure.

Asian markets also ended lower on Friday morning, taking the lead from the overnight losses on Wall Street. Japan’s Nikkei 225 and Chinese indices fell as much as 1% during the session before ending much higher heading at the closing bell.

Monday, 19 December 2022 / Published in Equities & Indices

Financial markets extended losses last week as investors were concerned over the hawkish stance and the aggressive policy tightening by major central banks despite growing recession worries, at a time an unprecedented spike in COVID-19 cases in China increases fears for a delayed reopening in the country.

Appetite for risky assets eased last week after hawkish signals from the Federal Reserve, Bank of England, and European Central Bank triggered concerns that rising interest rates, a sharp increase in borrowing costs, and persistently high inflation could spark an economic slowdown or a recession in 2023.

The three central banks delivered a smaller 50-basis point rate hike last week, flagging more increases to come, and projecting that interest rates would likely peak at higher-than-expected levels in 2023, hampering economic growth and weighing on the market risk sentiment.

Market reaction:

U.S. stocks suffered a second straight week of losses last Friday, with Dow Jones falling by 1.66% for the week, the S&P 500 dropping 2.09% and the tech-heavy Nasdaq Composite tumbling 2.72%, as fears continued to mount that the Fed’s aggressive tightening will slip the U.S. economy into a recession.

Nasdaq Composite, 1-hour chart

Asian-Pacific markets ended the first day of the week that is leading up to the Christmas holidays in red, with Chinese stocks leading the losses by nearly 1% on worries over the rising Covid-19 in the country after it scaled back several strict lockdown measures earlier in December.

However, as we got into European Monday’s trading, market sentiment improved as the fears for the rate hike outlook were offset by the falling dollar and bond yields, with Euro climbing back to $1,0650 a dollar, and the U.S. stock futures turning positive by 0,50%.

Both Brent and WTI crude oil prices added another 1% this morning to $80/b and $75/b respectively, extending last week’s gains of 3% on a supply disruption of the pipeline (with 620k bpd capacity ) that connects Canadian crude producers to U.S. refiners, on China’s reopening optimism, and after the news by the U.S. Energy Department on Friday that it will begin repurchasing crude oil for the Strategic Petroleum Reserve (SPR).

Monday, 11 October 2021 / Published in Equities & Indices

Inflation: The greatest enigma going forward

The biggest enigma over the next several quarters and, and perhaps years, will be inflation. In fact, weather we are talking about short term or long-term inflation, it’s the issue market participants will be required to wrestle with most.

Listening to analysts and pundits there is no agreement as to the inflation endgame. The debate on both sides is fierce, and both parties have convincing arguments. Central Bankers insist it is transitory, and so far, the bond market seems to agree (mostly).

However please note that dealing with inflation is something new to most market participants, especially fund managers. It has been several decades since fund managers had to deal with inflation, and very few of those that did, still manage money.

Central Bank policy still in focus

Monetary tightening sems to be on everyone’s mind. And while this tightening is still very vague, everyone agrees it will happen in some form. Initially at least, some form of tapering will happen (or so they say) and further on, we will get rate hikes.

Even assuming all the above happen, what is very different this time around is that negative real rates will still be with us (nominal rates adjusted for inflation). As such, this is not a typical economic rebound that we are used to. As such, investors need to adjust to a new reality, and that is one where yields will not rise by much in the face of an economic snapback.

Irrespective of what inflation does, there isn’t much Central Banks can do about it

If you recall, several years ago the Fed tried to raise rates in the name of inflation expectations. It did so to the tune of 2.5% and the U.S. economy and markets collapsed. So, if the economy was not able to withstand interest rates of 2.5% back then, how are today’s economies going to withstand the increase in interest rates needed to combat today’s inflation? The answer is they will not be able to. The US, Europe, and Japan cannot operate in a high interest rate environment. The main reason is that a significant rise will cause havoc for government budgets, debt to GDP metrics, and in most cases higher rates will trigger a recession.

In other words, even if we assume raising interest rates is the solution to fight inflation (a view that I do not subscribe to), it is impossible to raise interest rates to levels needed to fight today’s inflation headline numbers.

So, while Central Banks talk about tapering and higher rates (AKA normalization of policy), I am personally talking the rate hike talk with a huge amount of salt. This because economies will crash and burn with much higher rates, and that is not a Central Bank mandate in any country.

A long list of things to worry about

1. Economies are more leveraged today than they were just several years ago.
2. Individuals, companies, and governments have much more debt that needs to be serviced.
3. Markets have a much higher multiple than almost any time in the past.
4. Real estate prices are elevated all over the world.
5. Economies are snaping back, but there has been a lot of pull forward demand
6. Concerns about growth in China
7. A higher Dollar is bad for global growth

The big risk to economies and markets are higher rates. If we do see much higher rates, all my above worries will be triggered, and the outcome will be brutal. Central Bankers know this, which is why they are being vague about normalizing monetary policy, and refrain from saying when rates will “takeoff”.

Please note that while inflation is a concern, a collapsing economy and a bear market in equities is the lesser of two evils. As such, Central Banks will probably do more talking than acting when it comes to rates. Central Banks know all too well higher rates will do a lot of harm to economies and markets. And personally, I just don’t think this is what they have in mind.

So Central Banks will continue to assure markets they are committed to fighting inflation, but it will not act upon these commitments. But even if we assume Central Banks raise interest rates substantially to alleviate inflation concerns, they will probably lose.

So, what should investors do?

Overall, economies are still growing fast with fiscal and monetary policies still supportive for risk assets. However, investors must not be complacent. There are far too many things that could derail the current global economic recovery. There are still many potholes on the equity yellow-brick road.

My two biggest concerns are elevated equity valuations (especially the US), and the strengthening dollar. Especially insofar as the later, a stronger dollar means that there is either a dollar deficit in the world, or investors are buying dollars as a safe-haven trade. In both cases this is not good for equities.

However, to the extent that Central Banks don’t make a major policy mistake – like tightening too fast, or more than needed – equity markets should continue to offer better returns than bonds. It’s also important to remember that diversification is very important in this environment. Investors need to diversify across asset classes, geography, and sectors.

Tuesday, 26 January 2021 / Published in Equities & Indices

Global financial markets slightly fall in Tuesday trade, retreating from their record highs over persistent anxieties about possible barriers to Joe Biden’s $1.9T fiscal pandemic-relief stimulus and the rising Covid-19 cases around the world.

Uncertainty over the time and size of the US stimulus package:

US futures moved slightly lower on Tuesday amid softer risk appetite among investors over disagreements on President Joe Biden’s $1.9T stimulus package. The market worries about the timing of the package to be agreed as the Congress members debate about the size of the relief bill needed to stimulate the US economy. Even the Democratic Majority Leader Chuck Schumer notified yesterday that a complete bill could be four to six weeks away.

Covid worries and fresh lockdowns:

The market participants concern about the growing number of Covid cases around the world, especially in China. Many governments in Europe and Asia including China and Hong Kong have set additional strict lockdown measures to limit the spread of the new fast-spreading variant virus, increasing the economic damage in the local markets.

US markets:

The tech-heavy Nasdaq Composite rose 0.7% on Monday, hitting an intraday fresh all-time high of 13.700 before closed at 13.635, lifted by robust gains in some tech giants such as Apple, Microsoft, and Facebook.

The S&P 500 index also closed at record highs of 3.855, up 0.4% ahead of corporate earnings, while the industrial Dow Jones index slightly dropped 0.1% to 30.960 amid losses in Boeing and cyclical sectors over stimulus worries.

Asia-Pacific Markets:

Stocks in Asia retreated nearly 2% from their record highs in Tuesday trade following the overnight losses on Wall Street amid a general risk aversion sentiment and the geopolitical tension in the region.

The Hang Seng index in Hong Kong led to losses in Asia by 2.4%, following by 2% losses in China’s mainland indices after the boiling tensions in the Taiwan Strait and the South China Sea. Hence, South Korea’s Kospi followed with 2.2% losses, Japan’s Nikkei 225 slid 1%, while markets in Australia and India are closed for public holidays.

Commodities-Forex and Fed’s 2-day policy meeting:

WTI and Brent crude oil prices fell 1% on Tuesday morning to $52 and $55.50 per barrel respectively after China (the world’s largest fuel consumer) reported rising new virus cases and fresh restrictions, causing doubts over petroleum demand recovery in the country.

Gold and Silver prices rise above $1.850/oz and $25.50/oz respectively, gaining support from the falling 10-year US Treasury yields near 1.03%, despite the US dollar strengthen.

The DXY-US dollar index against major currencies rises to 90.50 while the EUR/USD retreated from the resistance level of 1.22, finding support near 1.21.

The recent strength in the safe-haven greenback came after the risk aversion mood over the speed and size of Biden’s stimulus bill, and ahead of the Federal Reserve’s two-day policy meeting, which is scheduled to begin later in the day.

Investors expect FED to maintain its dovish monetary policy and keep the zero interest rates for a longer time to help the US economy mitigate the pandemic-led damages.

The dovish Fed is a bearish signal for the US Treasury yields and US dollar while it is a bullish catalyst for the non-yielding gold and silver precious metals and other dollar-denominated commodities.