MARKETS

After dipping in and out of the red last week, worrying that the Fed’s inflation targeting could bring about a recession, equity markets ended the week in a relief rally fashion, led by tech and other oversold sectors, after Chair Powell hinted that the Fed would not look to shock the markets with 75 bp rate hikes at the next two meetings. And expectations continue to increase for a sizeable policy response from Chinese authorities ahead of a gnarly set of April data this week. This expectation is acting as a tailwind to sentiment.

Chair Powell’s appearance Tuesday at a WSJ event will attract some attention – but the data docket will do most of the talking this week with all eyes on US retail sales.

Indeed, investors remain laser-focused on the macro picture, particularly on consumer-based recessionary guidepost.

Still, the 2000 Tech-Bubble Crash analog would suggest the market has reached a comparable point of repricing and is possibly attracting dip buyers. But that does not mean the bear market is over, especially with the recession on everyone’s mind. I do not think that mortal coil passes quickly with traders looking to sniff out any signs of economic slowdown like a heat-seeking missile.

And while investment returns should be weaker in this cycle and without complicating the matter, higher interest rates imply smaller contributions to valuation. But looking at the post-pandemic market purely through the binary lens of Growth versus Value is becoming less relevant; investors will be driven by a different set of macro conditions and priorities than in the past, implying they will use different investment styles just like they did coming out of the 2000 tech crash.

Still, I do not think this is an excellent climate for investors as the market continues to trade on very short-term recessionary signals. And it is very “noisy,” keeping intraday volatility high with 150–250-point swings is common. Indeed, this is the hallmark of a market filled with air pockets which have left more than a few investors licking their wounds.

And while we have not reached that “sell everything “capitulation point, I do not think you want to be on the wrong side of the handshake line on this call.

OIL

Crude oil finished the week at the highest since March 25 as the market seemed more spooked by Russia turning off power flows into Finland, b, and that domino effect than the chatter of a Beijing lockdown.

The Covid situation in mainland China remains fluid, although expectations continue to increase for a sizeable policy response from the authorities ahead of April data this week. Just as Americans are gearing up for summer road trips (summer driving season), any China policy response is a boon for the bulls. Indeed, US gasoline futures contract climbed to its highest level on record, signalling more pain at the pump for US consumers and higher inflation, mind you, which should now fall under the FOMC’s watchful eye while trying to snuff out the inflation fires.

Oil sentiment turned bullish on Friday, possibly related to more positive steps suggested by the National Health Commission in incrementally opening up China’s economy within the country’s zero-covid framework.

Suppose China opens its major cities – even gradually – that increases the prospects for policy easing. China’s official institutions have been reluctant to enact a significant stimulus, with a locked-down economy not giving policymakers bang for their buck via the multiplier effect.

GOLD

Bonds started to go like equities last year, with value versus growth chopping around almost intraday. It is the same thing in rates with breakevens and reals. A massive gain in real rates has sent gold lower. Still, bullion is hanging on as the missing ingredient to send gold crashing through $1780 is an associated and significant decline in inflation expectations. Still, downward pressure is likely to linger in the near term, particularly if Chair Powell maintains a hawkish tone this week; however, gold could find a respite if US economic data turns sour.

FOREX

CNH

On Friday, there is bullish sentiment in China’s equities and CNH, particularly related to more positive steps suggested by the National Health Commission in incrementally opening up the economy within the country’s zero-covid framework. In addition, the policy overseers took to the airwave with “China CBIRC warns against betting on one-way yuan move.” Being an official agency of the PBoC, traders will take notice of these smoothing efforts. I suspect

AUD

While China’s stimulus this week could support the AUD, the big fear is China leaving the door open to on and off lockdowns and giving less scope to the monetary and fiscal policy upon the reopening. The significant risk is Beijing’s lockdown, which veers the market back to recession risk.

Any recessionary repricing will trigger AUDJPY selling again, which is typically viewed as the G-10 go-to hedge when the sum of all fears hits.

GBP

I think GBP could garner a lot of G-10 focus this week, and for all the wrong reasons, notwithstanding, the UK government is seemingly intent on adjusting the Northern Ireland protocol. Bond traders react to the BoE, sending more precise signals that it may soon approach its terminal rate as the UK economy heads toward a potential recession. Hence the UK yield curve had a massive and largely idiosyncratic repricing last week, where the belly has rallied a lot more than elsewhere.

Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT