Chief Investment Officer
Summary: Inflation seems to be the only factor that can change the direction of the stock market. Energy prices are now trading between 50% and 500% higher than average, depending on the fuel, and this represents a tax on consumption and business profits. We expect falling profit margins from here, but also a fragile risk market as interest rates looks ready to move higher to counter this cost pressure. This article looks at valuations, energy and the realisation dawning on market: the physical world is too small for the ESG focus and Green Transformation.
Chart: our internal valuation model. Below is a Z-score model derived from seven different measures of the stock market valuation. This is to avoid bias in data, but this chart is clear: the market has never been more expensive, ever!
On top of this several chart lines are at risk …. Most of them originating from the pandemic outbreak lows in 2020…..
Then this from Kim Cramer Larsson - our in-house chartist:
“With its close below support at 34,714 Friday Dow Jones Industrial Average Index has established a bearish trend. RSI below 40 is confirming the bear picture and we could see lower levels over the next week or so.
To reverse the downtrend a close above 35,510 is needed. First warning of that scenario unfolding would be for the Index to break back above the rising trend line its broke last week.
However, what is interesting is that the Future has not yet confirmed a bearish trend. The Future closed just above its support at around 34,572 Friday and has started the week on a positive note. However, RSI dipped below 40 indicating negative sentiment meaning the support could easily come under pressure next few days. A break and close below could fuel selloff down to strong support at around 33,285.”
Courtesy of Kim Fournais, this long-term SPX chart:
The Buffett Indicator: The Tobin Q valuation
Cost pressures / Inflation remain very underestimated:
courtesy @Ole S Hansen (OLH).
And then there are inflation expectations, which have seen in a seismic shift by some measures, including the New York survey of 1- and 3-year forward inflation expectations. Fed officials often refer to whether inflation is well-anchored – in our view, it is rapidly becoming downright unhinged. A further rise in rates to reflect these higher inflationary outcomes and rising expectations is coming and soon, driven by supply chain disruptions and this massive increase in energy input prices. I advise several companies, speak in front of even more, and none have hedged this move – not a one.
Invesco DB Commodity Index Tracking Fund:
Conclusion:
Only inflation can stop this equity market, it’s that simple. And we know the response function from policymakers as well. If or when this market drops, then ever large fiscal and accompanying monetary interventions will be mobilized and most of it tilted to more ESG and Green Transformation priorities. What policymakers have failed to account is the premise we outlines months ago: The physical world is simply too small for the attempt at upgrading infrastructure, fighting inequality with ESG and fighting climate change with the green transformation. Just this week, the UK is paying up huge amounts to fire up coal plants to keep the lights on, and tonight Illinois will probably halt the formerly scheduled decommissioning of the state’s nuclear power stations. A friend of mine commented that “Policy makers are now more fearful of blackouts than climate change”… Reality struck this week in energy and just maybe in risky assets.AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
