Thursday 30, June 2022

Looking back over two quarters

World stockmarkets (here represented by the ACWI ETF, which tracks the global, market-cap weighted, equity level), have had a relentlessly bad six months. The culprit is the tightening of monetary conditions. This is probably going to go on. Personal Consumption Expenditure, the Fed’s preferred measure of inflation came in at 6.3%, YoY. I think this was a shade above expectations, but it’s clearly too high. The PCE excludes all sorts of stuff (food, energy, transport, etc.) that the Fed doesn’t like to think about as contributing to the cost of living. (I jest, but only slightly.)

US long-dated yields have risen. Tightening has pushed down the yield by 60bp over the last few weeks, which might indicate that the markets think that the Fed has won. Or, it might just be that bond market weakening had just got ahead of itself, and needs to pull back.

Oil has behaved quite oddly. Basically, it was going up steadily, until 24 Feb, when Russia invaded Ukraine, then it shot up to $32/barrel in the first week of March, but since then it has has resolutely bounced around about $112, not really straying very far from that level, however bad the news about production stoppages or rampant demand.

Oil and inflation have to be closely intertwined. Oil is a direct or indirect input cost in almost everything we consume. Either oil catches up with inflation, or inflation is crushed by weakening oil prices. Of course Zero Carbon initiatives are complicating matters, and might force down demand, but it’s likely to be a couple of decades before we see oil demand turning the corner.

Wrap

Oil dropped as high inflation spooked markets into expecting more tightening. Or portfolio managers dumped stock to kitchen sink their dire quarters in the hope of getting as low a mark as possible against which their Q3 returns will be judged. Your guess is as good as mine.

The Yen strengthened, equities crashed, as did most commodities, bonds rallied. This was a classic risk-off day.

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I have been trying to reconcile tonight my sense of something wrong with the US equity bear case (outlined in my bullish thread this morning) vs the horrendous, potentially imminent breakdowns in the EUR, JPY, AUD, NZD, INR, KRW etc.

This is a thread. It’s quite subtle. It suggests that ‘Project Zimbabwe’ is some way off, even though it is on its way.