Sea of red on the boards this morning as risk turns off. After a decent rally for Europe, weakness in the US session and Asia is harder to shake off today. There’s little good news, bonds are capitulating, peace talks between Russia and Ukraine are going nowhere and China is locking down for Covid. And we have the spectre of stagflation + CBs hiking rates into a recessionary-type environment which = bear market conditions....albeit we have already hit that marker in some indices...so is the bottom in? The death cross on the S&P 500, as noted earlier this week, is seen as bearish but two years ago it happened after the bottom was in. Futures this morning back to the low end of the range around 4,150...feels like it wants to crack.
Hong Kong fell as much as 8%, paring losses to around 6%, its worst day since 2015, after analysts at JPMorgan described it as uninvestable amid a regulatory crackdown. The Hang Seng has lost 40% in the last year. Absolute carnage among China tech, chipmakers etc, ARK Innovation ETF (NYSE:ARKK) down another 6%. The S&P 500 closed down by 0.7%, while the Nasdaq Composite declined 2% and is now down 20% YTD. Tech stocks were the main driver for the selling as rates rip higher, with US US10-Year yields rising to their highest since July 2019, whilst energy also took a beating as oil prices crumbled with WTI back to $97. Exposed longs getting crushed on the China lockdown story it seems.
Inflation risks aplenty but I can sound like a broken record... Russia banning grain exports...“The recent moves in a range of commodity prices are extreme, and if these moves hold for a prolonged period of time, the economic damage would be significant, but we still do not believe recession needs to be the base outcome, and do not see equities falling from current levels,” JPMorgan (NYSE:JPM) says. Tesla (NASDAQ:TSLA) CEO Elon Musk warned the company faces ‘significant recent inflation pressure in raw materials and logistics’. Then he challenged Putin to single combat...
Growth slowing, with UBS lowering its global growth forecast from 4.6% to 3.6%. “The forecast is highly dependent on where commodity prices settle and whether energy supply to Europe will be disrupted,” the bank says. China going into lockdown means slower growth, but this hits oil prices and stocks are more sensitive to oil than anything else right now. India is also considering buying discounted Russian oil...If demand destruction can bring oil prices down it will be on balance good for risk.
Don’t forget the Fed. Although a rate hike is fully discounted, it’s going to be about the dot plots and what tone Jay Powell strikes. We will also be looking closely at where they think the terminal rate is: 2.5% is nowhere near close enough. Citi: "We see hawkish risk at Wednesday’s FOMC meeting. A 25bp hike is very likely but we think Chair Powell will leave the door open to the potential for a 50bp hike in May or beyond. Median 'dots' will likely show five (or very possibly six) 25bp hikes in 2022".
Piper: “The Fed may not tighten monetary policy as aggressively as the market expects. An inverted yield curve has been a bearish signal for the U.S. economy and has restrained the Fed in the past from hiking rates.”
Today’s sheet is focused on the US PPI print, Empire State manufacturing index and comments from Christine Lagarde.