Why the bloodbath in the stock market?
Just when we thought it was safe to get back in the waters, the inflation monster rears its ugly head once again.
Just when we thought it was safe to get back in the waters, the inflation monster rears its ugly head once again. Despite recent lower-than-expected inflation data prints, the US CPI showed that prices rose 8.3% year-on-year, rudely higher than the market expectations of 8.1%.
Investors panicked and revised their expectation of what the US Federal Reserve will do next week in their September policy meeting. The market was pricing a 90% chance of a 0.50% interest rate hike next week, but after the strong inflation surprise, the market is now pricing for at least a 0.75% hike, and a 35% chance of a 1.00% hike! (Priced for a 0.837% hike as seen below)
Will the Fed hike 1.00%? It will be counterproductive to panic hike, but that’s what the market is fearing now. With the Fed officials under a media embargo until after the policy meeting next week, the market is likely to be nervous and fearful till then.
Trading Tip
Fear begets fear
When the market starts to become fearful, momentum will start to build up once more data supports the reason for the bearish sentiment. This is because volatility tends to have a swelling effect in that once it spikes, it will linger at high levels for longer, resulting in prolonged fear in the market.
With the inflation scare from the US consumer price index (CPI) print yesterday, fear is lingering in the markets at the moment and further negative prints will only serve to worsen risk sentiment.
Tread lightly and reduce risk if you have to.
Day Ahead
UK Consumer Price Index (CPI) is expected to show that prices rose +10% Year-on-Year, increasing from the previous print of 10.1%. Inflation will remain high in the UK due to the circumstances of the economy.
US PPI data is expected to show YoY rise of 8.8%, slowing down from the previous print of 9.8%. A print higher than that could add to the panic selling caused by the CPI overshoot yesterday.
Trading Plan
1. Currencies:
EUR - Short the EUR. EUR is back down again as expected. The catalyst was the stronger than expected US inflation data. Stay short
2. Commodities:
Uranium & Energy - Stay invested
3. Stocks:
US Stock Index: The stock market had the worst one-day drop in 2 years as risk sentiment was severely dented by the stronger than expected US inflation print.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: The US Produce Price Index data release later today may increase inflation fears if it should be stronger than expected . The Ukraine-Russia war rages on, but the market impact is limited for now.
What Happened Yesterday
The US Consumer Price Index showed that prices rose +8.3% (vs 8.1% expected) Year-on-Year, a decline from July’s print of 8.5%. The surprisingly strong inflation print spooked markets and resulted in weak risk sentiment across the board.
The US Treasury yield curve remains inverted with a spike in the difference between the 2-year and 10-year bond yields to 0.33%. The 2yr yield and 10 yr yield increased +0.17% and +0.05% respectively as the market started to price in more front loading of rate hikes given the beating of inflation expectations.
The US stock market had a sell off due to the fragile risk sentiment . The S&P 500 declined -4.32%, the Dow Jones dropped -3.94% while the Nasdaq plummeted by -5.54%.
The crypto market was roiled by the inflation data as well. Bitcoin saw a collapse of -9.9%, while Ether fell -8.3%.
Headlines & Market Impact
Exclusive: U.S. considers China sanctions to deter Taiwan action, Taiwan presses EU
Notable Snippet: The United States is considering options for a sanctions package against China to deter it from invading Taiwan, with the European Union coming under diplomatic pressure from Taipei to do the same, according to sources familiar with the discussions.
In both cases, the idea is to take sanctions beyond measures already taken in the West to restrict some trade and investment with China in sensitive technologies like computer chips and telecoms equipment.
"The potential imposition of sanctions on China is a far more complex exercise than sanctions on Russia, given U.S. and allies' extensive entanglement with the Chinese economy," said Nazak Nikakhtar, a former senior U.S. Commerce Department official.
What we think: Sanctions against China may be counterproductive as it is the manufacturing hub of the world. The goods in China that are being produced at a lower cost are a major contributor to the moderate inflation levels before Covid and sanctions on China will just increase upside pressure on inflation.
Next rate hike will spark ‘dangerous game’ with state of economy, investor Peter Boockvar warns
Notable Snippet: “After next week’s rate hike, we’re going to start playing a dangerous game with the state of the economy. The next rate hike is going to be only the second time in 40 years that the Fed funds rate is going to exceed the prior peak in a rate hiking cycle,” the Bleakley Advisory Group chief investment officer told CNBC’s “Fast Money” on Tuesday. “We’re getting into treacherous waters.”
“We’re just barely seeing the cracks in housing. So, as that starts to come down, people are going to feel like they had less money than they did before… And then, we don’t know what that’s going to do to the economy,” he said. “This 75 [basis point rate hike] might even be a mistake. We know there’s a lag.”
“This is a Federal Reserve that could not raise interest rates 25 basis points in 2018 and actually turned the market into a convulsion, and ultimately they had to step back in and begin this easing process,” Tim Seymour, another “Fast Money” trader, added. “We went from a place where we could not raise rates even in good times let alone difficult times.”
What we think: The Federal Reserve said that they are willing to let the labour market take a beating in order to quell inflation. However, should the Fed overextend with its rate hikes, it might result in an economy that will be stuck in an extended slump.
Google considers making some Pixel phones in India, The Information reports
Notable Snippet: Alphabet Inc (GOOGL.O) is considering moving some production of Pixel phones to India following disruptions in China from COVID-19 lockdowns and Beijing's rising tensions with the United States, the Information reported on Monday, citing a source.
Alphabet, which did not immediately respond to a Reuters request for comment, has solicited bids from manufacturers in India to make between 500,000 and 1 million Pixel smartphones, equivalent to 10% to 20% of the estimated annual production for the device, according to the report.
The company's Chief Executive Officer Sundar Pichai previewed a plan to manufacture in India earlier this year but a final decision has not yet been made, the report added. If approved, India production operations will still require import of components from China.
What we think: India is an economy that presents great potential and opportunities. Once these multinational companies start to move some of their operations to India, there should be good opportunities for traders to ride on as well.
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord