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Strong Start For Equities
Navigating the next cycle Where to start? There’s a good investing quote that says “be fearful when others are greedy and to be greedy only when others are fearful”. Now I agree with this saying, to some extent. It’s easier said than done to observe the masses and do the opposite, however, when you are a retail or institution investor that has fully deployed capital into the markets choosing to be the conservative investor becomes increasingly difficult when you’re not sitting on cash. YTD U.S equities have slumped. 20%+, so it’s official. We’re in a bear market… It’s the same story repeating again, that is investors’ risk appetite increases upon hearing positive economic releases, then fears about multi-decade high inflation figures and talks about recession spark further capitulation in markets. This is and will continue to be reflected in leading economic indicators such as consumer confidence which shows consumers’ sentiment towards their financial conditions and future. Yesterday we saw strong demand for high-risk assets after all three major U.S index funds closed higher. 10Y treasury was subdued below the 3% mark closing below 2.8%. Lagard confirms ECB road to a rate hike The President of the ECB is keen on making a move after 8 years of negative rates. In case you’re not familiar with why central banks use negative rates, here’s an explanation. Simply put the world runs on credit, credit cards, business credit agreements, mortgage credit, everything. Now each domestic central bank governs the ease of access to credit within the economy through interest rates. A low rate environment encourages consumers and businesses to acquire debt to boost economic activity. For every dollar of debt, you or I may acquire, that becomes another person’s income (asset). So from this cycle repeating itself on a larger and more complex scale, we create an environment where personal income and levels of debt rise creating a landscape which births economic development. This has pros and cons as you can imagine, something I’ll touch upon later. The ECB has held rates at -0.50bps rate for a number of years but with 40-year high inflation, Lagarde is preparing to take a step against it at the next ECB rate decision. Providing we see the anticipated move towards a hike we can hopefully see the euro hold its ground as analysts are now calling for eurodollar rates to reach parity.
May 24, 2022 · 2 min read
Pure Fear In Global Asset Markets
Uk inflation figure hits 40-year high So yesterday this happened… Surprised? Not at all. The current issue at hand is for starters both the Fed and BoE are behind the curve when it comes to inflation. The “transitory” message as we all know was the biggest mistake which now we are paying for. The BoE has hiked rates three times back to back, something that is not common for any central bank, yet inflation persists. I mentioned in an earlier article, that the current inflation we are feeling is a result of a supply chain disruption, not due to demand. In essence, regardless of what the BoE do with rates their monetary policy tools simply won’t work in this scenario; to some extent reducing liquidity in the economy does prevent further overheating but the damage has already been done. Now, remember this CPI reading is the reading they are telling us, but looking at everything from your day-to-day livelihoods we know the effect on our pockets is much higher than the 9% figure we’re hearing. The tools each central bank control are restricted to interest rates and liquidity within the economy. As central banks tighten monetary policy, access to liquidity dries up so larger issues arise surrounding the ability of markets to sustain full functionality with lower volumes also arises. U.S financial conditions & China Goldman Sachs FCI (financial conditions index below) shows how we’re still in a historically loose landscape, but just from the chart alone, you can see where everything went up in flames. From the start of the year, we have been in a tightening phase within financial conditions, asset markets are down 20-30% from highs and quantitative tightening hasn’t even kicked in yet. That’s just the market’s forward pricing of the tightening cycle. As conditions tighten the dollar gains value as assets have to be sold into dollars before moving elsewhere or holding onto cash, so a demand surge for the dollar is what we’re currently experiencing and have seen the past few months. China & commodities The continued spread of Omicron within China is causing some real concern with the already constricted supply chains. The data speaks for itself really, every day Chinese manufacturers, shipments and freights are delayed the bill goes up. Year to date the Shanghai lockdown has cost global trade $28billion and counting. So tell me, will higher interest rates solve supply issues? Not in the slightest. Now the next thing is commodities. Russia invading Ukraine amidst a supply chain disruption, it only spells trouble. This comment from Manuel Abecasis of Goldman further reiterates the issue at hand. Food prices rocketing, and as Ukraine is currently restricted to harvesting a significantly lower portion of their usual harvest due to the war means two things. A shortage, so sooner than later we’ll see countries begin to run out of food and outrageous prices already seen in commodities such as wheat. 12% of the world's wheat, 15% of global corn and 47% of the world's sunflower oil. Yes, that’s 47%. I’ll be back over the weekend writing a deeper article, hope you enjoyed this piece! Once again I appreciate the support, re-shares and feedback
May 20, 2022 · 3 min read
Positive Data Boosts Risk Assets
Lowest Uk unemployment figures It’s been a while since we have heard anything positive from the UK, with recent messages relaying around an income squeeze, energy crisis and fears of stagflation within the economy at hand. Today we took a look into the health of the labour market which fared the test well with unemployment coming in at 3.7% vs 3.8%, the lowest levels seen since records began. Uk’s stock index, FTSE rallied just under a percent as positive data from the UK lifted sentiment. From ‘22 year highs the pound has suffered a depreciation of more than 11% shown below as concerns surrounding Russia-Ukraine, energy prices and out of hand inflation in the Uk led to an outflow from the risky sterling. As much as I want to believe good times are ahead for the Uk, this really is just a small highlight for a sinking ship. The BoE is expected to hold back on further monetary tightening for now as three back to back hikes haven’t hindered inflationary pressures, this leads directly into my next point. Wage growth vs CPI. Data coming out yesterday showed UK average earnings+bonuses grew by 7.0% YoY in March. Now, for the month of March, the ONS recorded a CPI reading of 7%, side note, the real figure is actually higher than that, showing that overall there was no true increase in personal income across the UK, rather wage growth managed to keep up mostly in the financial sector which contributes most for bonuses. For February the graph below shows wages lagging behind inflation. U.S Markets The major U.S indexes closed yesterday higher as data on retail sales beat the 0.4% forecast by a small margin topping 0.6%. Powell reinforced his optimism that the market and economy were strong enough to withstand the tightening in liquidity as the Fed battle soaring inflation figures. U.S treasuries were subdued below 3% with little demand for havens; there’s one thing I’ve got my eyes on, it’s consumer credit and defaults. In Q1 2022 U.S household debt level increased by $266 billion (1.7%), largely led by mortgage balances, in line with seasonal adjustments credit card debt levels decreased by $15 billion however compared with 2021 Q1 levels, credit card debt is still $71 billion higher. If you’re here till the end I appreciate you! Thanks for all the support and feedback, things are just getting started
May 18, 2022 · 3 min read
Haemorrhage in Asset Markets
The Fed, the markets and liquidity What happens when you get carried away at a dinner or a party? You forget the second layer effects you’ll have in the morning. Up until this year, we have experienced a goldilocks environment within financial markets; rallying equity market, robust labour market and narrowing credit spreads. As we know, credit spreads tend to widen during economic recessions and indicate an increased risk of default as well as reduced liquidity in the market. I’ll dive in on the importance of this instrument in a later piece, I’m still digesting its properties. Although we can say the Fed is to blame, which correctly they are, navigating monetary policy to avoid turbulence over the past two years has proved difficult amidst a global pandemic, war and supply chain issues. As shown by the chart above equities are down almost 20%, putting stocks in bear market territory, bonds have had their worst run in decades and crypto, the long-sought hedge has exceeded losses with its tight correlation to stocks. Year to date we have destroyed 14% of the global market value totalling roughly $35 trillion. Yes, $35 trillion. To emphasize this point take a look at the chart below, since 2018 analysts have calculated the correlation between the SPX and Fed balance sheet has been 0.92. To put it into scope, a correlation of 1.0 is a direct relationship par-to-par. A correlation of 0.92 means that for every $1 expansion in the Fed balance sheet the S&P 500 gained that same $1 amount. The most concerning thing is the Fed has not started its balance sheet run-off yet and markets have fallen off the cliff. Investors are feeling the effects of liquidity tightening within the economy and there’s no place to hide. Things are set to get worse as the Fed battles inflation, now it must be said that a soft landing isn’t probable. There has to be a trade-off, you can’t reduce liquidity in the economy in attempts to lower inflation whilst maintaining a tight labour market. It’s evident that the tight labour market will be the sacrifice as corporations begin to adjust to policy events.
May 16, 2022 · 2 min read
8.3% U.S Inflation. Crisis Inbound?
CPI data, true or manipulated? If you’re also wondering when will this bloodbath stop, I’ve got some news which may not be music to your ears per se. The inflation report for the U.S was released yesterday beating expectations at 8.3% YoY for April down from 8.5% in March. Now, if you’re still under the assumption that true inflation is the figure presented by the Bureau of Labour Statistics you’re in for a bit of a shock. Whilst CPI is meant to represent a measurement of price change in a basket of goods, the question you have to ask is who decides what the basket of goods is? And what happens if you change the items within the basket of goods? You guessed right, a manipulated CPI reading. True inflation is believed to be well above the 10% mark with analysts saying 13% was the true inflation figure for March 2022. For those in the Uk and U.S, think about it for a second, does inflation really feel like it’s high single figures or does it feel a lot more costlier than that? Chainlink has created a censorship-resistant inflation index called Truflation which runs on their public network, so check it out for some more insights. U.S equities & risk assets suffer Equities and risk assets faced another set of losses as inflation added to fears that the Fed need to act aggressively and hastily to prevent even higher readings. Capital flowed out of risk assets such as cryptocurrencies, which faced a pounding with ETH down 10% and BTC 5% lower, to the perceived safety of government debt. As of yesterday, all three major indexes were down, however, the Nasdaq once again took the headlines for all the wrong reasons closing 3% lower. U.S 10Y debt fell below 3% to 2.9% following the inflation reading. Commodities are still under the thumb of suppressed economic activity in China. Despite lower case numbers according to reports China doubles down on its strict lockdown measures which escalate worries overseas regarding supply chain disruptions. With China being one of the world’s largest consumers of commodities a drop in workforce doesn’t help commodities or the global outlook anymore. So now you see it, the real driver of global economic prosperity or hardship is China, the U.S and other nations simply following the leading indicator of the Chinese economy. Later today we have an array of releases from the Uk, we’ll see how GDP fared across Q1 and YoY. Once again, I appreciate you for reading all the way through, let me know your thoughts!
May 12, 2022 · 3 min read