It is always darkest before dawn
Abraham George Macro Musings
With so much happening in the markets, it is difficult to keep up but I will touch on some of the issues that I think are important.
The French election is out of the way and that’s a big relief. Based on opinion polls and Macron’s leadership performance so far, it was more or less certain that Macron would win. But there was that looming uncertainty due to precedents like Brexit and Trump's election victory. Next-gen tech like artificial intelligence is yet to discern any resentment and grievances people carry in their hearts to not change the outcome of the public opinion poll.
The French election result should provide continuity for the global social and environmental agenda. It also helps the European and NATO position on Russia regarding Ukraine. A Le Pen victory would have flushed this continental coordination down the drain.
Meanwhile, the Chinese situation is getting more worrying by the day. The Chinese government is locking down its economy again. It started in Shanghai and it is spreading to Beijing. The Chinese authorities are aiming for ‘Zero COVID’ and the draconian measures being implemented are very disturbing. based on what is being circulated on global media and social networks. I just hope other countries don’t follow suit.
On the financial front, China has been devaluing the Yuan in a very similar way to what happened in 2015. In fact, they made the biggest weakening adjustment yesterday. The Chinese central bank cut the reserve requirement ratio to encourage more lending and borrowing. While the developed world markets are tightening money, China is easing.
The Dow experienced its worst-performing day on Friday for this year and the selling continued more on Monday. For much of the day, the major US indices were in the red but they reversed in the later afternoon to finish positive. The NASDAQ ended up around 1.3%. As of yesterday (on a YTD basis), the S&P is down 10%, the Dow is down 7% and the Nasdaq is off 18%. It looks all doom and gloom but let me elaborate again on why one needs to be hopeful and contrarian at the moment.
I discussed the VIX index in my last report and even before. Considered by many as the “fear gauge”, it spiked by as much as 12% between Friday and yesterday. Whenever volatility expands, the VIX index starts to rise indicating a significant fall in the markets. That’s when markets become irrational, the pricing in Put/call ratios starts to get whacky, and the bearishness gets high. Collectively, markets have never been as bearish as it is now.
Jay Powell’s hawkish speech last Thursday is pricing in a hike of 175 basis points by 87% of market participants between now and June. I don’t see that happening. Currently, the Fed has raised only 25 basis points. Granted we get a hike of 50 basis points in May but don’t think we see another 100 basis points in another month. The 10-year yield after touching 3% is now trading at 2.81%.
The 35% level on the VIX has been a watershed level. Just following this level would have helped most market participants to pick a bottom in the S&P 500 for the last three decades except during the GFC in 2008 and the pandemic in March 2020 when the VIX spiked to 80 or slightly higher. I am not saying that it won’t happen again but current market conditions don’t warrant such a situation. VIX is currently around 27% to 29% and it can spike to 35%. But there is a descending trend line that is being touched now and if it respects that, the bottom may be already in or around the corner.
Also, if one looks at the S&P 500 there is a beautiful reverse head and shoulder pattern that it is trying to break out from. In fact, it was the test on the neckline that probably encouraged me to conclude that a bottom was in last week. In retrospect, that was premature. What I want to reiterate is that there is a solid bullish case to be made for the markets. The headwinds that we have been experiencing since last November should soon dissipate and a clearer trend should emerge.
The markets have been so caught up with the Twitter saga. What else is there that Elon Musk cannot do? The Twitter board is probably convinced that Musk is not all hot air but apparently has solid cash arrangements to complete the acquisition. There are a lot of unknowns at the moment but soon things will become clear. Not only does Musk want to be a torchbearer for new technologies but also set new standards in media reporting as well (‘free speech absolutism’ as he likes to define it).
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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.