Fed’s hawkish pivot. Are global equity markets doomed?
06/05/2022
After a strong rally, markets turned down on comments from Fed member Brainard that the Fed would be "quick" to raise rates and start cutting its bond portfolio starting in June.
Analyst with 15 years of experience. Successfully closed more than 30 transactions for a total of $20 billion (M&A and corporate reorganizations, IPO, SPO)
Anton Barinov
Chance to short-term stock buying.
Stocks reacted terribly, but we think we will see another bounce back up.
In our view, stock investors clearly did not understand the situation, while bonds, as usual, got it right.U.S. government bonds have seen a downward reversal in yields almost all along the curve, reflecting slowing inflation and LESS rather than a more aggressive Fed.
Note that Brainard mentioned slowing inflation in her speech as well, which is a good sign.That's why we think the current plunge is another chance to short-term stock buying.The 2-year yields are clearly on a downward trajectory and the recent horrible, but not horrible-horrible inflation data reinforces the idea that the 2-year yields are due for a pullback after their epic run-up. The 10-year yields will follow, which is a plus for tech stocks and currencies like the Japanese yen and Swiss franc.
In our view, stock investors clearly did not understand the situation, while bonds, as usual, got it right.U.S. government bonds have seen a downward reversal in yields almost all along the curve, reflecting slowing inflation and LESS rather than a more aggressive Fed.
Note that Brainard mentioned slowing inflation in her speech as well, which is a good sign.That's why we think the current plunge is another chance to short-term stock buying.The 2-year yields are clearly on a downward trajectory and the recent horrible, but not horrible-horrible inflation data reinforces the idea that the 2-year yields are due for a pullback after their epic run-up. The 10-year yields will follow, which is a plus for tech stocks and currencies like the Japanese yen and Swiss franc.
Japanese yen
The yen against the dollar reached late 2015 levels when investors were getting rid of the yen in hysterics as the Chinese (and therefore Japanese) economy began to slow and the dollar began to strengthen on expectations that the Fed would begin to raise rates.
The last few months have been a perfect storm for the yen as well:
- dollar bond yields were rising, making the dollar very attractive compared to the yen, where yields are negative or near zero;
- China was slowing the economy, fighting developers and imposing more and more quarantines;
- the cost of energy, which Japan imports entirely, flew into space, punching a hole in the country's balance of trade.
Now all these pressure points on the yen may weaken a bit.
We have already written above about U.S. bond yields.
China has promised to stimulate the economy and energy costs have stabilized a bit. We do not believe in oil at $200.
That is why we think that the yen will hold its current support and have a chance for a small rally (and maybe a big one) against the dollar.
The Japanese Finance Minister also thinks the yen is oversold. In official language, that means that measures will be taken. Something is being prepared behind the scenes.
The last few months have been a perfect storm for the yen as well:
- dollar bond yields were rising, making the dollar very attractive compared to the yen, where yields are negative or near zero;
- China was slowing the economy, fighting developers and imposing more and more quarantines;
- the cost of energy, which Japan imports entirely, flew into space, punching a hole in the country's balance of trade.
Now all these pressure points on the yen may weaken a bit.
We have already written above about U.S. bond yields.
China has promised to stimulate the economy and energy costs have stabilized a bit. We do not believe in oil at $200.
That is why we think that the yen will hold its current support and have a chance for a small rally (and maybe a big one) against the dollar.
The Japanese Finance Minister also thinks the yen is oversold. In official language, that means that measures will be taken. Something is being prepared behind the scenes.