Looking back at the first quarter, the market strength was quite impressive, not only in equities but also in the investment-grade bond market. Since the beginning of Q2, the path forward became more challenging as fears are mounting.
Last week, the selling pressure was mainly on tech stocks, which is understandable given the better performance year to date. Gold is the asset investors seem to be focused on right now. It should probably have been bitcoin though, as the orange coin is up 80% since the first of January.
US indices also started this week poorly as several major companies got pulled down. Apple announced that computer sales are down 40% during the first semester when the industry average was -29%.
Microsoft and META followed for a while before buyers bought some back.
US labour market figures on Friday came out stronger than expected. As usual there days, this is both good and bad news at the same time. But Fed funds are now implying a 75% probability of a rate hike of 25bps next month. This is a sign that investors are trying to shift away from recession fears to being focused on the bright side of things. On top of that, the World Bank revised their global growth forecast to 2% versus 1.70% last January. This improvement is said to occur on the back on a better economic outlook in China after many restrictions linked to Covid-19 hit the country.
The funny thing is that at the same time, the International Monetary Fund trimmed its global growth projections by 20bps, citing high uncertainty and risks as financial-sector stress adds to pressures emanating from tighter monetary policy. The IMF indeed thinks it’s too soon to sound the all-clear from the turmoil that has shaken the world financial system and said that “it remains to be seen whether the measures taken so far have been sufficient to fully restore confidence in markets and institutions.”
There are also signs that the housing market is softening in various countries with real-time housing data coming in softer than anticipated. I insist on “real-time” because by looking only at the Shelter CPI, one could think home prices are still holding strong. They are not. As usual, higher mortgages rates and cooling housing demand are weighing on the sector.
Market participants are still very much divided into two groups, one being way more pessimistic than the other.
In any case, a mild recession in the US is clearly not to be excluded and this could happen as early as this year. This obviously weighs on the USD and its stability was questioned several times last week. There were indeed headlines about the BRIC economies ((Brazil, Russia, India, China) seeking to create a competing currency and calling for de-dollarization, particularly in oil and commodity trading.
I tend to think there is still a long way before the US dollar weakening justifies a de-dollarization of significant scale but it BRIC countries want to give it a go, there’s nothing wrong with less centralization if you ask me.
Tomorrow, the US CPI will be published, on Thursday the Producer Price Index will follow and on Friday several major US banks will kick-off the earning season. So, despite being a short week, we will still get a better idea of what the Fed’s next moves will be.
Johan Thomyris
