Calendar Week 40-2022

 

A nasty quarter ends on a nasty note for investors, but for traders, the volatility brings more opportunities.

 

The Bond market has been in a bull run since the 1980s but that ended when inflation began ticking higher and Central Banks started to chase it in a panic. Technically it ended in June as the US 10yr posted a new lower low, the first since 2007 but it broke the trendline set since 1987.

 

I have never been a fan of QE and long advocated for it to be dumped as a Monetary tool. It is a band-aid solution, kicking the can down the road, and ultimately transfers wealth from the middle and lower classes to the upper. It inflates asset prices and hides inefficient companies and products.

 

Now that rates are rising rapidly, those who use interest rates to hedge their portfolio’s are getting squeezed and are having to sell assets to fund margin calls. This is what happened in the UK this week, and why the BoE – who are raising rates to combat rampant inflation – had to step in to lower rates at the long end. This is another form of QE and they had to use this tool to prevent a collapse in the financial system as margin calls coming thick and fast ended many pension fund portfolios. The fear from BoE was that the liquidation of these funds, could lead to broader impacts as the domino effect of asset liquidation spreads throughout the financial system. Again, this is shoring up a broken system using a broken too.

 

Lets look at the US, who are in a similar position but not yet being liquidated to the extent of the UK. Price Earnings Ratio in Jan 2022 were at levels not seen since the dotcom bubble. The value of US stocks to what they earn is ridiculously high. Even now, although we have dropped 26% since January, PE Ratio is still at 26.3, that is a crazy 31% above the average, and well above the normal 11-15 it trades at prior to QE coming mainstream in 2008.

 

So what does this all mean? It means we are in a generational move that will last longer and be more painful than 2008. The global economy is faltering and the US is heading into stagflation. This will make it harder for them to reduce inflation and drive growth. If only they had let the companies hit the wall in 2008, endure the pain we would not be here today. Sadly, the BoE has shown that Central Banks would prefer to use the QE tool rather than allowing a full blown recession. How they expect to bring inflation down with an inflationary tool is beyond my understanding of things.

 

At the end of the day, these moves are far from over and the volatility will be here for some time yet.

 

Week ahead to note, is that China are on holiday all week. We have RBA and RBNZ both looking at 0.5% rate rise and finish the week with US Payrolls.

 

Currency Guidance

 

USD – Has had a dip, which is great and what we have been waiting for. I would prefer it to be under 111, closer to 110 in fact, but we might not get that. Watch for buyers to come in this week and go with them when they do.

 

AUD – With commodities continue to sell off, I am happy to still be a seller of the Aussie. But it is too far gone out here. Perhaps the RBA move this week will give it a rally I can sell into, but again perhaps not as the RBA have signalled a weaker move with only 0.5% expected.

 

EUR – Found resistance at 0.9855, the lows of August. We have been saying for months that the target was 0.95 on the Euro, and it got a 95 handle print this week. I suspect it will have a 94 or even 92 print before this run is over.

 

GBP – Is having a relief rally. In reality, it does not deserve to have a 1 and should be under parity. Look to fade it circa 1.13 if other sellers come in.

 

JPY – The BoJ are being tested with their 145 line in the sand. My advice is don’t trade the Yen against the US but look at it against weaker currencies such as commodity currencies.