Trail 40 — Salvation in a Recession
Written by — Aashish Singh; Editor — Sylvia Lo
The week started off with hope. Hope that the selling pressures will abate after a half year wherein almost every asset class outside of commodities were hammered down. Risk assets such as Bitcoin and stocks rallied early in the week, in anticipation of a better second half, only to give up gains and slump as European inflation data (another record) came out that makes the ECB look like it is way behind the curve with still negative deposit rates(!). Globally, interest rates volatility in particular remains elevated. Upward pressure in the short term rates as central bankers maintain that price stability is their primary goal and downward pressure in the long term rates as recession risks grow, are responsible for much of this volatility. This theme will continue over the coming months, so keep the urge to “buy the dip” in check. In my view, there is some way yet to go for risk to be fully priced into equities. It is more likely that a market fully priced for a recession will be the “right price” to buy into.
Recession fears mount
Treasuries began the second half of the year on the front foot Friday as concerns continued to mount that Federal Reserve rate hikes will lead to a recession.
Benchmark 10-year yields fell six basis points to 2.95% in a fourth day of declines and looked set for their biggest weekly drop in seven weeks. The move spread to other markets with Australia’s three-year bond yields tumbling 21 basis points, just days before its central bank is expected to announce a half-point rate increase.
The latest leg of the global bond-market rally came after Fed Chair Jerome Powell said Wednesday that the risk of harm to the economy from higher rates was less important than restoring price stability. Traders continue to expect another 75-basis-point rate increase in July but bets on a peak have been pulled back to March 2023.
Volatility surge in Japanese Government bonds
The oftentimes sleepy market for JGBs has sprung to life this year amid speculation that rising global interest rates will force the Bank of Japan to abandon its yield-curve control policy, ending the price fluctuation limits that have historically squeezed trading opportunities.
Hope keeping a full blown rout at bay
Another S&P 500 bounce is being squashed as quickly as it surfaced. The optimistic spirits that keep driving bulls back to equities, however, are hanging around.
While punishment for optimism has been swift in 2022, a decade of bull-market conditioning is proving nearly impossible to vanquish. Retail investors mostly refuse to part with meme shares, bullish handicappers sit with predictions that many stocks will double, and valuations are high enough to imply an opinion that next year’s hit to earnings will be trivial.
Other notable news were — Industrial Metals had their worst quarter since the global financial crisis in 2008, Aussie Dollar dipped below 0.68 vs the USD as risk aversion grew and Hedge funds look poised to beat the market (S&P 500) for the first time since 2008.
Until next week.
Financial markets are fascinating, and I see them amalgamating the subjective and objective worlds. They are constantly evolving, follow no predetermined path and much like humans and society in general, their behaviour at most times is irrational. Yet, their day to day functioning is seemingly driven by facts and reasoning. They are filled with plenty of stories of triumph, tragedy and comedy. Every day they are thoroughly analysed and tried to make sense of. Yet, their future steps or directions cannot be predicted based on history. They follow a random walk. Therein lies their beauty.
If enjoying making sense of their randomness is as appealing to you as it is to me, each week, I briefly recap a few stories that captured my interest, with embedded source links available for those who wish to read more.
