Week in 7 charts (June 20)

Each week, Charles-Henry Monschau, CIO of Syz Bank, presents 7 graphs that describe the main events of the past week.

Charles-Henry MonshawGraph 1: Big week for central banks

06/20/2022  Central banks
Source: Charlie Bilello

As expected, the US Federal Reserve raised key rates by 75 basis points, the most aggressive step since 1994. But the Fed was not the only central bank to take center stage last week. Of course, the monetary authorities of countries whose currency is pegged to the dollar have sharply raised their rates (for example, Saudi Arabia). But the most unexpected step was the National Bank of Switzerland, which raised the rate by 50 basis points, 1time rate increase since 2007. The Bank of England also made adjustments by 25 basis points. At the same time, the European Central Bank held an unscheduled meeting and said it would take steps to halt widening yield spreads between Member States’ sovereign bonds.

In the rest of the world, Brazil raised its key rate (+50 basis points), as did Taiwan (+12.5 basis points). The only central bank that remains inactive is the Central Bank of Japan, which, despite inflationary pressures, has decided to maintain its policy of negative interest rates and use the yield curve to curb any growth in long-term profitability. As the graph shows, the growth of rates is global, but there are still big differences in real rates.

Graph 2: Will SNB soon sell some of the shares on the balance sheet?

SNB unexpectedly raised rates by 50 basis points to curb inflation, taking advantage of a window of opportunity to get closer to positive rates. The Swiss National Bank not only raised the key rate, but also warned that it could sell some of the securities on the balance sheet. Indeed, the SNB has diversified its foreign exchange reserves into stocks and corporate bonds over the years, and this trend may soon change. The goal is to sell US stocks and use dollars to buy Swiss francs to make it stronger and thus fight inflation. SNB currently owns about $ 177 billion in US stock, concentrated mainly in high-cap stocks. SNB is indeed one of the largest shareholders in Apple, Microsoft and Amazon in the world. Extra sales pressure for Nasdaq?

Source: Bloomberg

Chart 3: Dow Jones finishes in the red again

2022.6.20.  Dow Jones
Source: Bloomberg

The tight monetary policy of the Fed raises fears of recession and caused a sharp drop in shares for the second week in a row. The S&P 500 index recorded its worst weekly decline since March 2020 and entered the bear market, ending the week almost 24% below its January peak. As for the Dow Jones index, it recorded 11 weeks of decline over the last 12 – a series that has never been before. While US stocks rose after the FOMC’s decision on Wednesday night, sentiment on Wall Street deteriorated on Thursday due to weak macrodata. Indeed, several reports (start of housing, building permits) indicated that the US housing sector was already feeling the effects of the Fed’s tightening and rising mortgage rates. In addition, US retail sales were lower than expected, while weekly unemployment claims were higher than expected.

Diagram 4. Times remain very difficult for multidisciplinary

06/20/2022  Global portfolio
Source: Bloomberg

Shares were not the only asset class to suffer in the past week. Concerns about inflation and interest rates pushed the 10-year US Treasury yield to 3.49% on Tuesday (the highest level in more than a decade) and then fell to 3.24% at the end of the week. Most bond segments declined during the week.

The simultaneous fall of stocks and bonds greatly complicates multifunctional management. Indeed, the positive correlation between the two asset classes offsets the traditionally favorable impact of diversification. The US 60/40 index (stocks / bonds) fell by almost 20% from historical highs, with the magnitude of the fall almost evenly distributed between stocks and bonds.

Graph 5: Smart money buys US stocks to decline

06/20/2022  Smart money
Source: Bloomberg

Some figures seem to indicate that US stocks are clearly oversold. Another interesting indicator, Bloomberg’s SMART Money Flow has grown as part of this downtrend, creating de facto positive discrepancy. The smart cash flow index is calculated using a formula that measures Dow Jones stocks over two time periods: shortly after opening and during the last hour. The first few minutes are an emotional purchase driven by the greed and fear of the retail investor based on good and / or bad news. Recently, buying or selling by institutional investors has often predominated.

But be careful! The smart cash flow index can give false signals in the bear market, as short sellers tend to liquidate their positions at the end of the trading day (ie within the last 30 minutes), which briefly raises the market.

Chart 6: Credit market at a turning point?

Source: Bloomberg

High-yield bond markets continued to fall last week, with the ETF (HYG) falling to its lowest level since March 2020. At the time, the Fed intervened to support the bond market. debt and bought bonds for significant sums. This is not currently the priority of the monetary authority; The Fed now seems determined to fight inflation, even if it affects financial markets. The lack of “Fed paths” is perhaps the biggest stress for markets right now.

Chart 7: Is bitcoin oversold?

06/20/2022  Bitcoin
Source: Bloomberg

Bitcoin (-30%) has been the worst week since March 2020, when it reached a psychological threshold of $ 20,000. Important support that did not take place this weekend, as bitcoin even fell below the $ 20,000 mark due to cascading forced liquidations.

Ethereum has fallen even more, losing 35% in the last week alone. The point is that the liquidity crisis is now raging among several “crypto-creditors”.

Returning to bitcoin, it seems that the main cryptocurrency has never reached such a level of oversold.

Have a nice week everyone!