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2 May 2022 - Could the FED meeting spark a rally ?

The « last man standing » or in other words the big Technology companies in the US finally cracked. What had become a weakening trade since late 2021, it morphed into an avalanche of selling during April for Nasdaq, with most of the pressure felt during the last two weeks and culminating with a 14% drop for Amazon shares just on Friday alone. The FED’s aggressive plans for raising interest rates to more than 2.5% by year end and reducing its balance sheet at the same time, has led to the (expected) devaluation of the most expensive part of the equity markets. But as markets usually react in a perverse way, one could argue that the FED meeting on Wednesday could be the catalyst for a rebound as the sentiment is already deep in negative territory (usually a contrarian indicator).

The first quarter GDP in the US was announced much worse than expected, at -1.4% vs +1.1%, on quarter-on-quarter basis. However, the details of the report showed that the negative growth was primarily due to trade imbalances caused in March due to the war. Consumer spending remained strong, but decelerating.

In the Eurozone, first quarter GDP rose slightly less than expected, at 0.2% (qoq) vs 0.3%. However, the PMI indices for April were surprisingly strong and especially the Services component. It rose by 2points vs March to 57.7. Manufacturing on the other hand struggled according to the PMI subindex which fell 1 point from March, to 56.5.

The Bank of Japan left its interest rates unchanged, in a stark contrast with the Western world where rates seem to be rising fast. The JPY has taken a big hit because of that, falling to the lowest level in 20 years vs the USD.

Chinese equity markets rallied back from the abyss and finished the week on a positive note. According to various reports, the government looks to be reaching out to the big technology and e-commerce companies again in order to improve their relations and show to them and the world that the crackdown on their business practices is probably over. There seems to be a meeting scheduled for the next days between government officials and the CEOs of the biggest companies to that end, which is positive for the battered shares of Tencent, Alibaba etc.

The Q1 corporate results of the big-Tech names showed a very mixed picture. Apple posted strong results but warned about the current quarter of probably less than expected revenues due to supply chain issues. Amazon posted a quarterly loss, the first since 2015, as the company took a hit from its participation in the shares of Rivian, an electric vehicle maker. But it also lowered its earnings estimates for the current quarter as costs have increased significantly and advertising revenues are decelerating. One cannot ignore that such an advertising slowdown has been noted also by Google and Facebook, which confirms the scenario that the US economy could undergo a rough patch in the coming months, the result of high inflation and higher interest rates.

Government bond yields were volatile. They dropped from their recent highs but moved higher again as the week ended. The US 10-year is trading at 2.94% in anticipation of the FED meeting.

Oil rallied to 106$, as Germany seems to be positive on a ban of Russian Oil. But it fell back to around 103$, in line with the pressure in most commodities. Gold fell again below 1900$.

Charts of the Week

A traditionally good month for equities, April finally proved to be very harmful for investors. Inflation worries, aggressive Central Banks, an ongoing war and a Covid19 surge left their marks on equity prices, after an encouraging rally in March. The safety of the Swiss large-cap index was again confirmed with almost no loss for the month. Europe as a whole, also did much better than one would have imagined with just a 1.6% drop. China fell by 6%. The worst performing region was the US, with the S&P500 falling 9.1% and Nasdaq with an 13.5% drop. Nasdaq is now below the levels of January 2021, which means that it has now lost all gains of the previous year as well. The euphoria on some Tech names brought about by the pandemic has been fading since early 2021 and the recent earnings results show that more pain could come ahead for some of them. However, a significant and tradeable bounce from deeply oversold levels should be expected soon.

The recent sell-off of Chinese equities due to the Covid19 lockdowns has brought the index back to very interesting levels. This is the chart for the last 10 years. One can see that there is a clear long-term uptrend, with the 2015 rally being an exaggeration. The index just touched the lower boundary of this uptrend channel, which means that the next move should be a rebound. If history is any guide and the index returns to the upper part of the channel in the next 2 years, the possible returns are in excess of 60%. There are many fundamental reasons why this could happen. The Chinese economy looks to be ahead in the economic cycle in comparison to the western countries, as it is the first to have entered its intentional slowdown last year and all economic indicators (before Covid) have been showing significant improvement lately. The authorities are ready to act to stimulate the economy, at a time when the West is raising interest rates.


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