Interesting things are happening in the markets. All in all, we have been living in very exciting times for 14 years since the global financial crisis. The crisis itself is not a problem, not the first and not the last. However, it has provoked unprecedented “quantitative easing”, low base interest rates and even negative interest rates on both LIBOR and some government bond yields.
Yields in Italy, Germany and France were still negative, while yields in Japan were negative for up to 5 years, at the time of writing. But processes are already underway where negative interest rates are withdrawing from the market. 6 months LIBOR are already positive. In a word, the time of rewriting economics textbooks.
And today we live in special times. The ending pandemic lockdown (in China only recently ended), the war in Eastern Europe that turned into a kind of cold WWIII. It is clear that market participants are affected by many emotions: fear and greed, hope and disillusionment. In all its beauty. On full display. The scariest word today is Inflation.
S&P 500 analysis
This year, the S&P 500 index has already down about -14% since ATH. An obvious bear market:
The base of almost all S&P 500 futures has become positive, which presupposes that market participants perceive the tightening of monetary policy as a „normalization” of the market in these days,. When the base is positive, short-term interest rates exceed dividend yields. In this case, it is said that the return for investors is negative – Negative Carry.
And in that case, stock prices tend to fall. Let’s add to the case the fear of rising inflation, the uncertain outlook for the global economy due to the double disruption of the supply chain. Therefore, the fall in stock prices may continue for some time.
Recently, the price of oil has become a hostage to geopolitical factors, and oil has become a tool for political decisions. The world situation is pushing up oil prices. As evidence, there is a high positive correlation between the US dollar index and the price of oil. Normally, the correlation is negative: as the dollar rises, oil prices fall and vice versa. We can see this clearly in the price chart:
However, a political decision has been made to increase oil production in OPEC countries in order to reduce prices. Who needs such a solution? In particular, the price of oil is a key factor in determining the level of inflation. As countries fight high inflation, oil prices need to start falling. Such an agreement was reached between the US and OPEC +.
Second, Russia is financing the war in Ukraine by selling raw materials. Therefore, peace in Ukraine is aimed at reducing financial support for the Russian army. Political games are taking place here again: the embargo and the increase in oil supply. These are purely political games that have nothing to do with supply-demand dynamics. But such is life now and it is completely understandable.
However, we do not expect a rapid drop in the price of oil. There are, however, objective factors that keep prices high. This is a rebalancing of the oil supply chain. With the abandonment of Russian oil and gas, raw materials need to be transported elsewhere. There are places to transport, but the logistics are not yet in place. That affects oil prices today, i.e. raises them.
Logistics in the markets
In military terms, Infantry wins battles, logistics wins wars. Is now similar in the global economy.. With the collapse of the Soviet Union, globalization began, opening up new avenues for international trade. And it was very good. Free trade on free roads is a very effective means of reducing inflation and increasing the well-being of the population.
With Putin attacking Ukraine and China seeking to occupy Taiwan and dominate the Pacific, globalization has been a real threat. These two countries are demonstrates hostility to the democratic forces of the world without any masks. And the best days of globalization are likely behind us.. Withdrawal from globalization or fragmented globalization has the potential to lead to higher secular inflation, as efficiency and free trade will be undermined.
Therefore, the „normalization” of markets may end soon. And despite inflationary threats, the Fed has said interest rate hikes could be halted because it’s completely unclear what will happen to the world in the fall. That is, there may be a situation where raising interest rates can be dangerous.
The war in Ukraine does not seem to end until the winter. There is a threat of economic recession with rising inflation – stagflation. As a result, the Fed and other central banks will have a big question: fight inflation or save the economy. Today, market participants are still calm about the situation or do not yet see threats. But as the end of this year approaches, fears in the markets will grow even more.
The Precious metals
When the unclear what’s going on markets, investors can turn to gold and silver as safeguards for investment capital. In an environment of stagflation, the Fed will likely to fight the recession first and only then inflation. As a result, metal prices will start to rise. But without precious metals, investors and traders will raise the prices of copper, uranium, natural gas and even oil and coal.
Today, gold and silver are traded at a discount. This is the best time to replenish your investment portfolios. We have always said that those who invest in precious metals must take advantage of discounts in the market. Now is your time!
We have always said that the of central banks about „transit” inflation are out of tongue. That’s, most likely, they don’t know what they’re talking about and it will end badly. That’s what happened. Inflation remains high and growth risks remain. And the World Bank cut its global GDP growth forecast from 4.1% to 2.9%. The world is in danger of stagflation.
On the other hand, purely statistical modeling of inflation predicts a decline. And such central bank as National Bank of China, Bank of Japan, and National Bank of Switzerland still keep historically low interest rates and aren’t even going to change them any time soon. In their view, the situation in the markets is relatively under control.
But the most important thing in an economy is consumer and business confidence and the speed with which money flows. Confidence has plummeted and pessimism prevails among business managers.
And the pace of money circulation is steadily declining. And this trend has been going on for a long time and does not seem to depend much on the global economy’s conjuncture.
So, the market situation is really complicated. And that’s became not yesterday and not today. Pandemics and wars are only catalysts to accelerate the process, but without these factors, global economic growth will be more negative than positive.
Therefore it is necessary to invest and invest a lot. Because it is these investments that can protect you from future turbulence, which can be much more complex and deeper than today’s situation in the global economy and markets.