Each week, Charles-Henri Monchau, Chief Information Officer of Syz Bank, presents 7 charts depicting the main events of the past week.
Chart 1: Big week for central banks
As expected, the US Federal Reserve raised key rates by 75 basis points, the most aggressive move since 1994. But the Fed wasn’t the only central bank to take center stage last week. Of course, the monetary authorities of countries whose currencies are pegged to the dollar have quietly raised their rates (for example, Saudi Arabia). But the most unexpected move was made by the Swiss National Bank, which raised its rates by 50 basis points.time rate increase since 2007. The Bank of England also made a 25 basis point adjustment. At the same time, the European Central Bank held an unscheduled meeting and said it would take action to stop widening yield spreads between member states’ sovereign bonds.
In the rest of the world, Brazil raised its key rate (+50 bps), as did Taiwan (+12.5 bps). The only central bank that remains dormant is the Central Bank of Japan, which, despite inflationary pressures, has decided to maintain its negative interest rate policy and use yield curve controls to negate any rise in long-term yields. As you can see from the graph, the growth in rates is global, but there are still large discrepancies in real rates.
Diagram 2: Will the SNB sell part of the shares on its balance sheet in the near future?
The SNB unexpectedly raised rates by 50 basis points to curb inflation, seizing the opportunity to move closer to positive rates. The Swiss National Bank not only raised its key rate, but also warned that it could sell some of the securities on its balance sheet. Indeed, the SNB has diversified its foreign exchange reserves into equities and corporate bonds over the years, and this trend may soon change. Goal: Sell US stocks and use dollars to buy Swiss francs to make them stronger and thus fight inflation. SNB currently owns about $177 billion in US stock, mostly concentrated in large-cap technology stocks. SNB is indeed one of the largest shareholders of Apple, Microsoft and Amazon in the world. Additional Selling Pressure for the Nasdaq?
Chart 3: The Dow is in the red again
The tightening of the Fed’s monetary policy raises fears of a recession and leads to a sharp fall in stocks for the second week in a row. The S&P 500 posted its worst weekly decline since March 2020 and entered a bear market, ending the week almost 24% below its January peak. As for the Dow Jones index, it has recorded 11 weeks of decline over the past 12, which has never happened before. While US stocks rose after the FOMC decision on Wednesday evening, Wall Street sentiment worsened on Thursday due to weak macroeconomic data. Indeed, several reports (housing start, building permits) have indicated that the US housing sector is already feeling the impact of the Fed’s tightening and the steep rise in mortgage rates. In addition, US retail sales were lower than expected and weekly jobless claims were higher than expected.
Diagram 4. Times remain very difficult for multimanagement
Stocks weren’t the only asset class that took a hit last week. Worries about inflation and interest rates pushed the 10-year US Treasury yield to 3.49% on Tuesday (the highest level in more than a decade) before falling to 3.24% at the end of the week. Most bond segments decline during the week.
The simultaneous fall of stocks and bonds makes multi-management very difficult. Indeed, the positive correlation between the two asset classes cancels out the traditionally beneficial effects of diversification. The US 60/40 Index (Stocks/Bonds) is down nearly 20% from its all-time highs, with the magnitude of the decline being almost evenly split between equities and bonds.
Chart 5: Smart money buys US stocks on the decline
Some indicators indicate that US stocks are clearly in the oversold zone. Another indicator worthy of curiosity, Bloomberg’s SMART Money Flow soared as part of this downward move in stocks, creating de facto positive difference. The Smart Money Flow Index is calculated using a formula that measures Dow Jones stock over two time periods: shortly after opening and within the last hour. The first few minutes are emotional buying driven by the greed and fear of retail investors based on good and/or bad news. The last hour is often dominated by buying or selling by institutional investors.
Be careful! The Smart Money Flow Index can give false signals in a bear market, as short sellers tend to liquidate their positions at the end of the trading day (i.e., within the last 30 minutes), which briefly lifts the market.
Chart 6: Is the credit market at its limit?
High-yield bond markets continued to fall over the past week, with the High-yield Corporate Bond (HYG) ETF falling to its lowest level since March 2020. At the time, the Fed stepped in to support the bond market and purchased significant amounts of bonds. . This is not currently a priority for the monetary authorities; The Fed now appears determined to fight inflation, even if it affects financial markets. The lack of a Fed put is perhaps the biggest stress on the markets right now.
Chart 7: Is Bitcoin Oversold?
Bitcoin (-30%) had its worst week since March 2020 when it hit the $20,000 psychological threshold. Important support that did not hold this weekend as bitcoin even fell below the $20,000 mark due to a cascading forced liquidation.
Ethereum suffered an even bigger drop, losing 35% in the last week alone. We are talking about a liquidity crisis that is currently raging among several “crypto lenders”.
Returning to bitcoin, it seems that the main cryptocurrency has never reached this level of oversold.
Have a good week everyone!