Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Investment Strategist
Summary: Market sentiment is weak across equity indices but also crypto expressing that the most risk-taking market participants are dialing back on risk. Friday's US inflation figures show core inflation is getting entrenched at levels where it is increasingly likely that the Fed will have to pull the brakes hard to kill demand and restore more normal inflationary dynamics. Russia's tactics in Ukraine will worsen the food crisis and the weekend has shown that China has difficulties opening up suggesting supply chains will remain fragile.
After the rebound in global equities that started on 25 May global equities went into a consolidation phase which got taking out during last Thursday’s session. The selloff extended on Friday and has gotten worse in today’s session with Nasdaq 100 futures around the lows for the cycle around 11,530 and Bitcoin is trading around 23,600 following the decision by Celsius (crypto lender) to halt withdrawals. Interest rates are rallying with the US 10-year yield now at 3.24%, and forward Fed Funds Rate futures are suggesting significant increase in the overnight interest rate in the US over the coming year. Finally, the US yield curve has inverted suggesting the probability of a recession is going up and the Michigan survey on Friday showed that long-term inflation expectations are going higher.
The culprit of the current selloff is a combination of very ugly dynamics all pointing towards the world is galloping into a crisis mode. Friday’s inflation figures showed a core CPI m/m of 0.6% and if one strips out all the components in the core CPI that has some link to energy prices the core inflation rate is still running at 0.4% m/m which is almost 5% annualized. The market is finally realising that the Fed will have to pull the brakes hard to stop inflation. In many our latest equity notes on historical drawdowns in equities we have said that the current drawdown could extend to around 30-35% and take over a year to reach the trough from the peak; our main hypothesis is that the current drawdown is combining dynamics from the dot-com bubble and the energy crisis in the 1970s.
On top of the inflation figures in the US, the world also got to see Putin’s cards over the weekend as his latest speech shows that he sees himself as the new Peter the Great and that he is on a crusade to ‘take back Russian lands’. It is becoming clearer that Russia is using the war in Ukraine to stage a food crisis. Yale history professor Timothy Snyder is saying that Russia’s deliberate strategy is to cause a hunger crisis that will hit Africa hard and could cause disruptive flows of immigrants to Europe stabilizing the region. Market participants are increasingly preparing for an energy and food crisis that will extend well into 2023 and put upward pressure on inflation and cause an economic recession in many emerging market countries.
Over the weekend, it also became clear that China’s reopening will prove more difficult. The expected reopening of schools in certain regions has been postponed and mass testing has been introduced in Shanghai after new cases have been registered. Unfortunately it looks like China could be in back and forth lockdowns for the rest of the year causing continued disruptions in global supply chains.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)