Is a major market turnaround in the offing?
Abraham George Market Musings
Last week was a memorable one in many ways. Firstly, the Fed raised rates for the first time in four years by 25 basis points. They also gave an indication that they are prepared to raise rates many times during the year and even next year. As long as those rate hikes are in increments of 25 bps, it shouldn’t make any much difference to the equity markets.
The fear of rising interest rates was solved in one shot; the net reaction of the markets was for the equities to go up. Should they raise by 50 basis points in between, that could have a negative reaction to equities. But my hunch is that they will not. For that matter, I don’t see the Fed raising rates anything more than three times for the whole year? As the cowboy saying goes, “it is all hat and no cattle.”
Most of the general public is stuck with the headline news and is not willing to think outside or beyond the box by trying to connect the dots with the history of prior Fed comments or actions.
Why do you think the Fed and the White House went for the biggest and boldest monetary and fiscal responses of all times with the COVID shutdown? Don’t you think it was deliberate - done to inflate growth and inflate away debt (not only in the US but globally)? We have already seen the outcome of the policy response in stocks and broad assets. Values have inflated.
Most importantly, the Fed has done nothing to stop inflation. This is intentional. Didn’t Powell tell us a long way back that they would let inflation substantially overshoot their target rate of 2% before even thinking about removing emergency level policies? Now we should expect asset prices to overshoot as well.
Since November last year, markets have been looking for a top mainly on the back of inflation fears and interest rate hikes. The war situation came much later as a surprise and the markets had not discounted that. So that too added to the general market weakness.
Last week, we saw signs and hopes of a ceasefire. But as it stands, the Russians are continuing to bomb the daylights out of Ukraine and the world is just watching it helplessly. This war is surely the fly in the ointment.
Everything else is pointing to a clear turn in the markets to the upside as we open on Monday. After a 14.6% correction in the S&P 500 YTD, we are seeing the first signs of a technical break up from the big downtrend.
The biggest catalyst for the markets last week came from China. Remember last year, the Chinese government waged a war against its own technology companies. I mean the big Chinese tech giants. It started with the Chinese ride-hailing company Didi. It went public last June, and was the biggest Chinese listing in the US, ever. Very soon the Chinese government started harassing the company for a number of alleged violations. With over one trillion dollars’ worth of companies on US exchanges, the SEC also joined in their efforts to crackdown on the lack of reporting irregularities from Chinese companies.
By November, Didi was asked to delist from NYSE. Was it a coincidence the tech-heavy Nasdaq topped just three days before that? Since then, the future of Chinese companies listed on US exchanges has been in question. That includes some of the biggest tech companies in the world as to the likes of Alibaba and JD.com.
But last week, the Chinese tech stocks saw their largest one-day rally ever. The Hang Seng Index was up 9% and the Hang Seng Tech index soared roughly 20%. Alibaba alone was up by 36% in one day. So what happened?
The Chinese stocks were heavily oversold. It was the highest in the last 20 years including that of the GFC in 2008. Investors have been running for the exits with the high-handedness of the government regulations. There have been growing concerns that the US will de-list many of the largest Chinese companies over the next few years.
There have been fears that the US would impose economic sanctions on Chinese businesses, given their support for Russia. Probably sensing all this a high ranking government official, Vice Premier Liu He, gave a speech before a key financial stability committee and basically assured the markets that stimulus measures are in the pipeline and more importantly he addressed other concerns that have been hurting the markets related to US listings as well.
So it is no surprise the Chinese markets reacted so strongly to the upside. Last week’s actions in China could be a major bottom in the markets as well. Unless the war situation turns really ugly a turnaround in all major equity markets is in the offing.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.