2022-11-13 Sunday Market Update
Past Week’s News:
- US: A midterm election with a split result, however, was still considered a win for Biden because the Democrats did not back that much. (Senate: D48|R49; House: D189|R207)
- US CPI Lower than expected 7.7% (expected 8%, September 8.2%)
- China: CPI 2.1% (a decline from 2.8% in September)
- China: PPI -1.3% y/y (a decline from 0.9% y/y in September)
- UK: Decided to start selling bonds on 29th of November 2022
Past Week’s News:
- US: Midterm election without a real result, considered a win for Biden. (Senate: D48|R49; House: D189|R207)
- US CPI Lower than expected 7.7% (expected 8%, September 8.2%)
- China: CPI 2.1% (a decline from 2.8% in September)
- China: PPI -1.3% y/y (a decline from 0.9% y/y in September)
- UK: Decided to start selling bonds on 29th of November 2022
Market sentiment:
Last week ended strong due to a surprise in lower CPI – “only” 7.1% compared to the expected 8%, and the previous 8.2%. Of course, it is relieving that it looks like inflation is coming down, but this might be unrealistic depending on the lagging effects. However, markets, especially risk markets, took this as good news and we could see a relief risk-on rally.
This bumped the Fear vs Greed from 54% to 71%, and the average increase across the major indices is now 9.62% (since 10th Oct.).
What is interesting to note is that these last days’ increases have been with the VIX under 25 and in decline. So the question is whether this is temporary, whether the VIX is charging for an upward move, and whether we should expect increased volatility. The last price is at 22.52, which is well below the YTD median of 26.09.
- This Week’s Fear vs Greed 71%
- Last Week’s Fear vs Greed 54%
Indices: 30 Days & YTD
Market Update: Indices
Comment: Indices
For indices, the CPI became the trigger for last week’s strong finish. The lower inflation, and continued decline gave hope that this might be the start of the end and that we can go back to risk-on assets. For example, Nasdaq (tech heavy) did the biggest jump and ended the week almost 10% above Wednesday’s close.
In the short term, we can see that most indices are trading at a 30-day top, however, if we zoom out to the past year’s data, most Indices are trading around their medians and means. So this past rally that has been going on since October has now reached the year’s mean, and the question is whether it will continue, or if this is going to act as a ceiling.
Zooming out once more, in the 10-year graph, we see that most indices are still trading well above their inter-quartile range (box-plot boxes), and well above the mean and median. I interpret this as if we are in for some reset, then there is still plenty of downside.
Even though I thought the midterm was going to have more impact than it did, and this got overshadowed by the CPI numbers, I do not believe that this is the end of the bear market. We still have a recession in front of us (which the central banks have just started to recognize), and we have not seen the annual reports of 2022, which will surely be a disappointment in Q1 of 2023… Therefore, I still believe this is a bear market rally and will turn south before Christmas. However, what is tricky with bear market rallies, which we just saw, is that they can increase by a lot in a short time, and push higher just until we start to believe they are about to end… therefore, be careful, and if unsure, it is better to stay outside than try to trade it.
Graph that shows the last increase across US sectors for the last 30 days and 2022. The last month’s rally has been relatively even across the sectors, however, zooming out to the YTD graph we see (no surprise) Energy as the clear winner. Given the inflation climate, and coming recessions, I believe Energy and sectors consisting of “real assets” are a better bet than sectors that depends on future revenue and low-interest rate investments.
Market Update: Rates
Comment: Rates
Just like everything else that was affected by CPI, rates across 2-, 10-, and 30 years declined due to the lower inflation. This is also why we could see risk-on sectors go up, as we know, rates go down, and prices go up.
Even though we should be happier with lower rates, we will see how the CPI plays out at the central banks. FED has been increasing rates to get inflation under control, and now if inflation is declining, then are the rate hikes going to stop? This would be the best scenario, however, if rates go down and asset prices go up, then this will contribute to asset inflation, which is eventually going to trickle into the economy… So there is no easy way of doing this in the short term, but if we zoom out, then 7.7% inflation is still high, and far from the goal of 2%. Therefore, it is unlikely that solely this CPI will lead to a FED pivot.
One thing to keep in mind is, what is the maximum rate? How high can it go? Both the private and public sector is more leveraged than ever, so is it possible to raise rates to for example 10%? And what will be the effects?
Market Update: FX
Comment: FX
Just a few comments regarding FX:
First, since the rate came down and asset prices went up, we also see a weaker USD. However, the USD is still strong across most currencies, and it will be interesting to see if this is a temporary decline (given my view of further market declines before Christmas)
Second, we can see that the GBP is now back to more “normal” levels since the past (turbulent) month. However, here it is important to remember that the Bank of England has announced to start QT (buying back bonds) at the end of November, but they have assured they will try to do this with minimum effect on the markets… will be interesting to follow and see what effects this will have on FTSE and GBP.
Market Update: Commodities
Comment: Commodities
Commodities are trading higher, and last week we can see a break out in most metals (focus on gold). In the YTD graph, we can also see a small/marginal decline in energy, and wheat, and an increase in cotton.
For me, given my narrative with the future recession, lower markets, and no FED pivot (at least this year, and earliest end of winter, early spring), then I believe we can see higher commodity prices in the short-term future and a new rally.
However, if this is the beginning of the “supercycle” – I do not know… but if the supercycle starts, or if we see a lot higher commodity prices shortly, then this is going to affect inflation (higher inflation) and make companies’ margins shrink, which will result in lower net income, etc. So even though I am bullish on commodities, higher commodity prices are going to have bad side effects on the economy, which will require further action from FED/governments.
Summary:
- Lower US CPI made the markets rally, and made rates and USD fall.
- Risk is more on, but I still believe this is a bear market rally, because there are no indications for a FED pivot, and the economic outlook is too pessimistic for me to feel optimistic about new highs…
- Well, except for new highs in commodities, because I think there will be a commodity rally in the short term. However, this might have bad consequences on the rest of the markets, so this rally will be bitter-sweet…
Next Week:
- 15 Nov. EURO GDP (preliminary)
- 15 Nov. UK Unemployment
- 16 Nov. UK CPI