Markets Dive, Central Banks Pivot: Keeping a Bullish Stance Amid Uncertainty
Abraham George Market Musings
Contrary to my very bullish view last week, markets turned south, and several factors contributed to this downturn.
After flirting with a 4.30% yield on the U.S. 10-year bonds several times last year and numerous times this year, yields have surged sharply to 4.5%. This is the first instance since November 2007 that 10-year yields have climbed this high. This development has significant implications for mortgage rates and credit card delinquencies.
Ever since the S&P 500 bottomed out in March this year, we have, for the first time, broken below the 45-degree sloping trendline, moving distinctly downward. Of all trendlines, the 45-degree line is the most reliable and sustainable. Additionally, the Vix level witnessed a significant spike. To make matters worse, the US may be on the brink of a government shutdown. If it lasts more than 10 days, it would likely have a very negative impact on the markets.
The inverted yield curve has been a concern for many. Historically, every time the yield curve has inverted (when short-term rates surpass long-term rates), markets have typically entered a recession within six to eighteen months. It's crucial to remember that we experienced a technical recession in the first half of 2022. Is it possible that the Fed is intentionally pushing for a recession to gain better control over inflation?
The Fed is treading cautiously and is concerned about an economy growing at a near annual rate of 5%.
If you've followed my reports consistently, you'll know that I've often described the four major central banks' collective efforts to achieve price stability and control excessive volatility.
To this end, the three primary central banks of the US, Eurozone, and UK have consistently been raising rates and implementing QT. In contrast, the Bank of Japan has been infusing liquidity into the system, maintaining a very relaxed monetary policy. When the US unexpectedly paused interest rate hikes this month, the Bank of England followed suit, despite facing more substantial inflationary pressures.
The BOJ, for now, has the privilege of continuing its existing policies, as they have yet to encounter the inflationary pressures evident in the other three major economies. To date, the BOJ has served as a liquidity counterbalance to the Western world's efforts to withdraw liquidity. They've been purchasing foreign government bonds, notably US treasuries, with newly minted Yen.
For the benefit of the Western world, the BOJ has consistently adhered to its ultra-accommodative policy, which was evident last week. The decision by the Western central banks to halt interest rate hikes, possibly for an extended period, also brings relief to the BOJ.
I believe that Japan is starting to feel some inflationary pressures. When they decide to act on this, it will be a pivotal moment for all other markets.
Currently, the statements made by the head of the European Central Bank at Jackson Hole hold significant weight. While many hoped that central banks would refrain from manipulating the economy and markets, Lagarde stated that we require more "robust policymaking in an age of shifts and breaks." Keep a close eye on the central banks.
Despite the current market weakness, my overall stance remains bullish.
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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.