Each week, Charles-Henry Monschau, CIO of Syz Bank, presents 7 graphs that describe the main events of the last week.
Figure 1: Rally at the end of the quarter
The S&P 500 rose more than 6% in the second best week of 2022. We will remind, at the end of 1 year stock markets rose by 6%.is quarter, when the S&P 500 rose 11% in a few days in the second half of March. This time the rally at the end of the quarter lasted longer to materialize. But since June 16, the S&P 500 has grown by 6%. With four sessions left by the end of June, will there be a rally at the end of the quarter on the same scale as in the first quarter?
Chart 2: The risk of recession in the United States is increasing
This may seem paradoxical, but one of the main reasons for the growth of markets in recent days is the deterioration of macroeconomic indicators. Indeed, this bad news is interpreted by investors as a positive development, as it indicates a moderation in inflationary pressures and, consequently, the Fed’s rate hike cycle (see Chart 3).
The probability of a recession in the United States (and other developed countries) is increasing, as shown in the graph below. Bloomberg Economics even mentions a quasi-guaranteed recession. A hypothesis that is not meaningless, at least if we want to talk about a “technical” recession (ie, two consecutive quarters in which GDP is consistently declining). Indeed, US GDP growth is 1is quarter was -1.3%. Atlanta Fed forecasts that the US economy is expected to stagnate or shrink again in the second quarter. Therefore, we are very close to the so-called “technical” recession. But the biggest risk for markets would be a serious and prolonged recession.
Chart 3: Expectations of a Fed rate hike are easing
As a result of disappointing macroeconomic indicators, the market is revising its forecasts for the amplitude of the US monetary tightening cycle.
Market expectations for US inflation (5-year break-even inflation) fell to 2.69%, the lowest level in a year. Investors now expect the Fed to complete its boost cycle much earlier than expected, most likely during the midterm elections.
Graph 4: There are still no signs of capitulation in the stock markets
During market phases, which are characterized by significant declines, investors often try to determine when markets “capitulate”, ie the situation when sales flows “end” and which is a preamble to a sustainable recovery of the market.
What do the various mood indicators say? Some of them clearly demonstrate the situation of oversold, but others are much less convincing. For example, US cash flows do not show market capitulation. On the contrary, during the recession, investors accumulated equity funds. Zenitud, which suggests that we may not have witnessed the true phase of stress that usually characterizes the end of the “bear market.”
Figure 5: The specter of a serious energy crisis for the European Union
The European economy is on the verge of stagflation. In May, the producer price index in Germany reached 33.6% in 12 months, which is the highest figure for the time when the statistics exist. The increase in electricity by 90.4% is one of the main reasons. These figures do not bode well for subsequent inflation. At the same time, business confidence surveys continue to deteriorate, indicating low growth over the next few months.
And the worst may be yet to come. The European Union will undoubtedly have to face a serious energy crisis. Many European countries are very (too) dependent on Russian gas. The latter is Putin’s best weapon. On July 11, Russia will decommission the Nord Stream-1 gas pipeline for “maintenance.” Putin’s goal is to prevent Europe from using the summer to store as much gas as possible until next winter, even though the level of reserves is already very low. Consequence: Germany has raised the level of alarm to Phase 2 and is preparing to implement a number of emergency solutions, such as more coal use, as well as rationing, with consequences that we know about industrial production. The shock to German (and therefore European) growth this winter could be very significant; the study predicts a 9% drop in German GDP in 1is quarter of 2023.
The International Energy Agency has warned the EU to immediately prepare for a complete halt to Russian gas exports this winter, urging governments to take action to reduce demand and keep obsolete nuclear power plants open.
Graph 6: More than 50% of goods are in the “bear market”
The major central banks now have a very clear plan: a rapid and aggressive tightening of monetary policy that will weigh demand to reduce rising inflation. This pressure on demand affects commodity prices. More than 50% of goods are now in the bear market (ie more than a 20% drop from highs). A decline that could help curb inflationary pressures, even if oil prices remain relatively high.
Chart 7: Chinese online stocks far outperform the S&P 500
China’s stock markets rebounded positively last week, thanks in part to hopes of stimulus after President Xi Jinping promised to introduce more measures to support the economy and minimize the impact of COVID-19.
Since the year, the KraneShares China Internet ETF (KWEB) has significantly outperformed the S&P 500 SPY ETF (-11.9% vs. -20.8%) after rebounding 50% from its lowest point since early March. Since the end of May (24/5) KWEB has increased by 29.7% against a decrease of 4.5% for SPY.
Have a nice week!