Week on 7 Charts (June 27)

Each week, Charles-Henri Monchau, CIO at Syz Bank, presents 7 graphs that highlight the main events of the past week.

Chart 1: Rally at the end of the quarter

Charles-Henri MonchauxThe S&P 500 is up over 6% for its second best week of 2022. Recall that the stock markets at the end of the first quarter there was a rise.uh quarter when the S&P 500 rose 11% in a few days in the second half of March. This time, the quarter-end rally took longer to materialize. But since June 16, the S&P 500 is up 6%. With four sessions left until the end of June, will there be a rally at the end of the quarter on the same scale as in the first quarter?

2022.06.27.SP500 Performance
S&P 500 Quarterly (%): First Quarter vs. Previous. 2 sq. 2022
Source: custom

Chart 2: US recession risk on the rise

It may seem paradoxical, but one of the main reasons for the rise in markets in recent days is due to the deterioration of macroeconomic indicators. Indeed, this bad news is being interpreted by investors as a positive development, as it suggests moderate inflationary pressures and hence a Fed rate hike cycle (see Chart 3).

The likelihood of a recession in the US (and other developed countries) is rising, as shown in the chart below. Bloomberg Economics even mentions a quasi-guaranteed recession. A hypothesis that makes sense, at least if we want to talk about a “technical” recession (i.e., two consecutive quarters in which GDP consistently shows a fall). Indeed, US GDP growth of 1uh quarter was -1.3%. According to the Atlanta Fed forecasts, the US economy is expected to stagnate or contract again in the second quarter. Thus, we are very close to the so-called “technical” recession. But the biggest risk to the markets will be a severe and prolonged recession.

2022.06.27.Possibility of recession
The probability of a recession in the US economy in the next 24 months
Source: Bloomberg.

Chart 3: Fed rate hike expectations decline

As a result of disappointing macroeconomic indicators, the market is revising downward its forecasts for the amplitude of the US monetary tightening cycle.

Market expectations for US inflation (5-year break-even inflation) fell to 2.69%, the lowest level in a year. Investors now expect the Fed to end its rate hike cycle much sooner than expected, most likely ahead of the midterm elections.

2022.06.27.Rate increase cycle
The market now expects the rate hike cycle to end as early as March 2023.
Source: Bloomberg.

Chart 4: still no signs of capitulation in the stock markets

During market phases characterized by significant declines, investors often seek to determine when the markets “capitulate”, that is, the situation when the flow of sales “dries up”, which is the preamble to a sustainable market recovery.

What do the various sentiment indicators say? Some of them clearly show an oversold situation, but others are much less convincing. For example, capital flows in the US do not show market capitulations. On the contrary, investors accumulated their own funds during the recession. A “zoom” that suggests that we may not yet be witnessing the true phase of stress that usually characterizes the end of a bear market.

2022.06.27.Capital flows
Source: DB, The Daily Shot.

Figure 5: The ghost of a major energy crisis for the European Union

The European economy is on the verge of “stagflation”. In May, the producer price index in Germany over the past 12 months reached 33.6%, which is the highest figure in the history of the existence of statistics. One of the main reasons is the increase in electricity consumption by 90.4%. These figures do not bode well for the next inflation figures. At the same time, business confidence indicators continue to deteriorate, suggesting poor growth performance over the next few months.

And the worst could be yet to come. The European Union will certainly have to face a serious energy crisis. Many European countries are very (too) dependent on Russian gas. The latter is Putin’s best weapon. The Nord Stream 1 gas pipeline will be decommissioned by Russia on July 11 for “maintenance”. Putin’s goal is to prevent Europe from taking advantage of the summer to store as much gas as possible until next winter, even though stock levels are already very low. Implications: Germany has raised the alert to level 2 and is preparing to implement a series of emergency decisions, such as increased use of coal as well as rationing, with implications we know about industrial production. The shock to German (and therefore European) growth this winter could be very significant; study predicts German GDP to fall by 9% in 1uh quarter 2023.

The International Energy Agency has warned the EU to immediately prepare for a total shutdown of Russian gas exports this winter, urging governments to take action to reduce demand and keep aging nuclear power plants running.

2022.06.27.Gas shock
Source: Bloomberg, Bundesbank.

Chart 6: Over 50% of commodities are in a bear market.

The major central banks now have a very clear plan: rapid and aggressive tightening of monetary policy, which will put pressure on demand to bring inflation down. This pressure on demand has implications for commodity prices. Over 50% of commodities are now in a bear market (i.e. more than 20% down from highs). A decline that could help contain inflationary pressures even if oil prices remain relatively high.

06/27/2022 Return of goods
Source: TME, Twitter

Chart 7: Chinese Internet Stocks Outperform S&P 500

China’s stock markets traded positively again last week, partly on hopes of recovery after President Xi Jinping vowed to take more measures to support the economy and minimize the impact of COVID-19.

The KraneShares China Internet ETF (KWEB) has outperformed the S&P 500 SPY ETF (-11.9% vs. -20.8%) YtD after rebounding 50% from its low since early March. Since the end of May (24/5) KWEB has added 29.7% against the fall of SPY by 4.5%.

2022.06.27.Chinese Internet Headlines
Source: custom

Have a good week everyone!