Investing

Is The Correction In The Markets Over?

Calogero Selvaggio discusses the current inflationary period and what the economic data tells us.

We have been in the red for about two weeks now, and as I have reported in the past, fear of an “economic slowdown” is dominating the market. Inflation is still too high and does not seem to be as “transitory” as the “big bosses” want us to believe. The futures opened in the red last week due to worsening sentiment on the Chinese debt of the Evergrande Group, where regulators are cracking down on the “abuses” that have driven up property values and loans that have contributed to the collapse prices of new construction to near default; and the Federal Reserve meeting that will lead to a “new direction”, towards reducing stimulus from November.

Economic Data and Forecasts

Last Wednesday’s Fed meeting sets out further details on the path forward for the “coveted” rate tapering. Powell is expected to remain open to “running changes” in the face of any issues that may arise (an accelerated tapering and a rate hike). In fact he hinted at a reduction in interest rate purchases by the end of the year (after the November meeting) and the dot plot indicates that an interest rate increase of 0.3% could come as early as next year. The aim will be to have inflation just above 2% “for a while”. The new economic projections of the FOMC show inflation in 2022 up to 2.2 % from 2.1 % in the previous estimates, and a forecast of 2.2% in 2023. Unemployment is forecast at 3.8% in 2022 and 3.5% the following year, and GDP is forecast to rise to 3.8% in 2022 and 2.5% in 2023 (currently at 6.7% compared compared to previous figures of 6.6%).

Central Banks Start Changing Their Mind

QE ($120 billion per month) could soon be reduced and the Fed could start raising rates earlier than the markets expected. After recent declines, US Treasury bond prices returned to the upside. The yield on the ten-year bond rose to 1.56% (the highest since June). The yield on the ten-year bond rose to 1.56% (the highest since June) and consequently caused turmoil on the stock markets (remember, it is not a “red candle” that detererminate the trend). These are due (obviously) to the Fed’s decisions not to reduce stimulus but to “feel” the pressure of monetary tightening (tapering gradual tapering that will end within six months of the the new year) and to leave interest rates close to zero (forecasting a rise in 2022), and finally to inflation (energy prices have increased, +7% in the last month), which is expected to fall back towards the 2% target as soon as the rise in prices in some sectors stop.

Paradoxically, Lagarde, unlike Powell, raised questions on the “transitory” inflation, pointing out that we are coming from a 10-year period of “dis-inflationary regimes” and therefore higher inflation during this period is to be “endured”.

If we shift our attention to gold, we see that it is moving over the support formed at the $1676 USD level (since June 2020), creating a “channel” that we can call “lateralisation”. In fact, for several months now, gold has hardly “functioned” as a “safe haven asset” for several months now and the and the recent fall is due to its strong correlation with real rates, which have risen (the first sign of a regime change?). The dollar, despite the fact that there is no the link from before, has risen acting as a “protection” benefiting from the quarterly GDP. But watch out for the unemployment data, which are on the rise, rising to 362 thousand compared to the 335 thousand forecast. If we analyze the data from the financial crisis of 2008 to today, it seems as if we are in a similar situation to 2013, because prices are forming a pattern of decreasing highs in anticipation of a new “danger” Taper tantrum.

Figure 1 – Taper Tantrum

Analyzing the S&P500 at the time of the US House’s approval of the debt ceiling, we can see how this produced a Relief Rally, this is a respite from a broader market sell-off that results in temporarily higher stock prices, and then rebounded again when the Senate passed the ceiling again, (it looks like the classic “Dead Cat Bounce” but we await confirmation). The political situation is putting a strain on the American system and, to quote Yellen, ‘failure to reach an agreement could result in the Treasury Department defaulting’. Specifically, the “debt ceiling” does not authorize new spending, but allows the sale of bonds with the consequent increase in the ceiling. I think the market for the time being has already discounted the news that Congress will not be able to suspend or raise the debt ceiling (raised or suspended 78 times since 1960), so we should expect volatility to increase as the deadline approaches (18 October) and in the event of a resumption of the trend.

Figure 2 – S&P 500 Analysis

While investors are scrambling for a possible short-term “pullback”, they know that a pull back is the rule in these situations and could therefore represent an investment opportunity. Beyond that, I think the more appropriate question to ask at the moment is: Will inflationary growth put pressure on central banks, will these concerns lead to interest rates rises, or will it impact demand (and lead to stagflationary circumstances)? All we can do is wait.

Disclaimer: “This article has been written for information purposes only and the technical analysis of the charts is a personal viewpoint. It does not constitute a solicitation, offer, advice, consultancy or investment recommendation and as such is not intended to encourage the purchase of assets. I would like to remind you that any of assets is highly risky and therefore, any investment decision and risk remains with the individual investor”.

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