The first half is finally over, but the pain is certainly here to stay.
Ugly data
The unemployment rate in the US fell but the average monthly job additions fell from 562 to 488’000, while inflation advanced from 7.1% to 8.5% despite the Federal Reserve (Fed)’s efforts to bring it down, as crude oil jumped more than 70% when the war in Ukraine started, and is still up by more than 40% since the beginning of January. The US 10-year treasury yield more than doubled, from around 1.50% to near 3.50% by mid-June, and more dramatically, the US 2-year yield took the lift and rallied from near 0.70% to almost around 3.50%, as well. The 2-10 year portion of the US yield curve inverted a couple of times during the first half of the year, screaming that a recession may be on the road map for the US in the next 12 to 18 months, and the probability of a global recession advanced to 30 to 50%.
Ugly markets
The S&P500 which saw its last record high on the 4th of January, took a dive, and closed the first half in the bear market, having lost more than 20% since the beginning of the year, while Nasdaq, which is more sensitive to the Fed policy and to the rising interest rates, closed the first half more than 30% down.
Gold did a good job as a hedge to turmoiled markets. It gave a good protection to investors, especially during the start of the Ukrainian war, and is flat year to date. However, the rising US yields, which increased the opportunity cost of holding the non-interest-bearing gold certainly limited the upside potential of the precious metal, and gold starts the second half having stepped into its long-term bearish trend, just a touch above the $1800 per ounce, with the prospect of a further easing toward the $1680 mark, the 2021 lows.
Bitcoin proved to be an imperfect hedge against both inflation and the falling markets. It has been betrayed by a high correlation with the volatile technology stocks. Bitcoin dived 60% since the start of the year and kicks off the second half below the $20K mark.
JP Morgan said that the current phase of deleveraging is now at an advanced stage and that the selloff may not last longer. The cryptocurrencies should yet convince masses that it’s a good investment again. Ff the overall market selloff slows, we may see the cryptocurrencies stop the fast bleeding, but we will hardly see them spike to the moon in the near term.
Among the European indices, DAX is down by more than 20%, and remains under a heavy selling pressure as the war on the continent, and the threat of a massive energy crisis weigh on appetite for German stocks, and FTSE which benefited from surging oil and commodity prices could lose is almost flat, down by less than 4% since the first day of the year.
Funnily, Chinese stocks diverged positively in the latest quarter, to catch up the losses for the year. Nasdaq’s Golden Dragon China index rebounded by more than 65% since the March dip, and is starting the second quarter a touch lower than where we were at the start of the year. That’s not oo bad!
What’s next?
The pain may not be over, as the Fed is expected to remain as aggressive as needed until it sees a material and a persistent softening in inflation. The problem is, inflation doesn’t necessarily come from the demand side, meaning that even with an aggressive policy tightening, the Fed may not achieve its goal soon enough.
So, what will happen now? Nothing new. Inflation will remain the major driving factor of the markets in the second half, and the overall market sentiment will hugely depend on inflation numbers.
The only thing that could help inflation fears ease is lower energy and commodity prices. In this sense, we have some encouraging news. The base metals had their worst quarterly slump since 2008, and Invesco’s base metals fund is about 12% lower than where it started the year. Ishares diversified commodity index has stepped in the bearish consolidation zone after falling below the major 38.2% Fibonacci retracement on year-to-date rally, hinting that further easing is perhaps on the cards.
American crude fell to $106 per barrel yesterday. As expected, OPEC increased its oil production by another 650’000 barrels per day. But the selloff in oil was mostly triggered by the recession fears as investors don’t even know whether OPEC could meet its production targets in the coming months. And even if they did, the refining capacity remains limited and oil giants prefer pocketing the money they make, rather than investing in something that is left to die in just a bit more than a decade.
As a result, the price pullbacks into the $100pb are still seen as opportunity to buy a dip.
