Comment of the Day
Video commentary for May 3rd 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: stocks markets quiet ahead of Bank of England and Fed rate decisions, China rebounding on easier monetary policy, Australia weakness on tighter policy, commodities at risk from slower growth. The biggest risk to a recovery is stagflation. gold at 200-day MA, Russell 2000 at 1000-day MA.
Rogoff Sees Fed Hiking Rates Up to 5% as Prices 'Out of Control'
This article from Bloomberg may be of interest to subscribers. Here is a section:
Fed Chair Jerome Powell and his colleagues are expected to raise interest rates by 50 basis points on Wednesday and signal they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the central bank’s 2% target.
Rogoff spoke about the “risks of having a perfect storm” of recessions, where European economic growth contracts because of Russia’s war in Ukraine, China’s does the same due to “a failed Covid lockdown policy,” and the U.S. economy shrinks because the Fed “tightens too much, too fast.”
“If China has a supply recession, which is really what we’re talking about, that’s going to feed inflation, it’s going to hurt demand in Europe,” Rogoff said. “I would say the risk has risen palpably, that this might happen,” he said of a U.S. economic contraction that would hit global financial markets.
“Things could work out well, and so there’s a lot of uncertainty -- but it’s not hard to see all of these risks,” he said, adding that China “might already be bordering on recession.”
My view - Over the last month Treasuries sold off aggressively, the Dollar surged, major stock market indices pulled back sharply, and gold contracted. Conventional energy sources like natural gas and coal surged while crude oil has been steady.
These trends have been pricing in both the potential for successive 50-basis point interest rate hikes and the supply disruptions arising from Russia using commodities as an economic weapon. Tomorrow’s Fed meeting will deliver news on the interest rate front but will do nothing to change the Ukraine question.
Politburo Brightens Mood for China Stocks After Gloomy Month
This article from Bloomberg may be of interest to subscribers. Here is a section:
“The meeting addressed most of the pressing issues in the economy and is intended to boost confidence and turn around negative sentiment,” said Xiong Yuan, chief economist at Guosheng Securities. “It’s a rare exception that the Politburo publishes the statement during the trading day. Clearly it’s meant to incentivize investors to hold on to positions ahead of the holiday.
China’s top leaders responded to calls from investors and analysts alike to revive an economy hurt by Covid lockdowns that this week spread to Beijing and Yiwu, disrupting business operations and roiling global supply chains. The Politburo’s readout -- which was released at the earliest time of day of any since at least January 2017 -- came ahead of a five-day break for onshore markets.
While headwinds for China’s economy and markets still remain, in particular the government’s adherence to Covid Zero, traders are now asking whether this can be the long-awaited market bottom.
The CSI 300 Index jumped 2.4% Friday, trimming this year’s loss to 19%. That still makes it one of the world’s worst performing national benchmarks, far outpacing the 13% decline in MSCI Inc.’s Asia Pacific gauge.
My view - Mainland Chinese stock markets are closed until Thursday for the May holiday, but Hong Kong reopened today. Faced with the political impossibility of altering the COVID-zero program, the central government have little choice but to cede some ground on its recalibration of the economy. That should represent further progress in supporting the trend of the credit impulse.
Rba Rate Rise Knocks the Wind Out of ASX
This article from the Sydney Morning Herald may be of interest to subscribers. Here it is in full:
The Australian sharemarket hit a downdraft when the Reserve Bank of Australia raised interest rates by a surprisingly large 25 basis points yesterday, as the markets digested the implications of rising debt costs.
The ASX 200 dropped 0.4 per cent, or 30.8 points to close at 7316.2 with tech stocks, the health care and industrials the only sectors to close in the black. Miners like BHP, Fortescue and Rio sunk after iron ore prices slumped overnight. Fortescue led the declines with a 4.8 per cent share price drop and Rio Tinto closed 1.5 per cent lower.
Finance stocks also took a hit with ratings agency Standard & Poor's saying home loan arrears are likely to drift up from historically low levels following yesterday's increase in interest rates.
Russel Chesler, head of investments at VanEck, said higher credit costs are likely to dent big bank profits.
"Locally, we are likely to see the big banks come under pressure in the month ahead as higher rates dent the banks' earnings from mortgages and bad debts could jump on higher credit costs." He expects companies which act like an inflation hedge, like gold and infrastructure, are likely to outperform. And despite the drop yesterday, rising commodity prices are expected to support the big miners through 2022.
"In this environment, with inflation running hot and interest rates rising, companies, including cyclical stocks, that can increase their prices and keep their customers at the same time, are likely to outperform," he said.
In other news, the chief executives of Australia's two largest private employers, Woolworths and Wesfarmers have thrown their support behind an increase in workers' wages amid persistently rising inflation and a tightening labour market.
There was also good news about the pandemic recovery, Transurban chief executive Scott Charlton said toll-road traffic has fully rebounded in Australia and is almost at normal levels in the US as businesses and consumers emerge from the pandemic.
My view - This is the first Australian interest rate hike since 2011. With CPI at 5% and testing the upper side of a 30-year base formation, the RBA can be expected to continue to hike but perhaps not as quickly as other developed markets.