Only thing certain about current markets is volatility
Abraham George Market Musings
The biggest news last week was the release of the CPI numbers. The numbers in themselves were not that far off from market expectations. The market was discounting 7.3% but it came in at 7.5%. But the truth is that the Fed is now 750 points behind the curve (with rates at zero and inflation at 7.5%).
But what really irked the markets was a Fed voting member’s comments suggesting that the Fed could hike by as much as 100 basis points by July. This is the Fed’s way of setting market expectations, which is a form of market tightening. The ten-year rates have already risen from 1.35% to over 2% in the very few months. That’s already a big move. But will the ten-year yield keep on rising? I don’t think so. It should soon top out around 2.10 or so.
Risk aversion hit the markets on late Friday when the White House commented about the potential for a Russian invasion of Ukraine. It was very clear as the 10 years completely reversed track as many equity investors wanted to find safety in the comfort of bonds. Another signal of flight to safety was the movement in gold. Gold screamed higher on the White House / Ukraine news. So did oil as it rose another 4.5% on Friday.
However, oil is a different story. Given the concerted global agenda to destroy fossil fuels, the underinvestment in oil exploration has led to an under-supply causing all this pent-up demand. We have been bullish on oil for more than a year but it may be time to take profits or stay out of markets for a longer time on oil. What does this all tell us? The market is trading very much on headline news and emotions.
A Fed that is posturing more aggressively should be good for markets. We have just the opposite situation of what happened in 2013. Back then, the policy error was removing emergency policies too early. Now the Fed is a bit too late. We also have investment banks announcing that they see about 7 to 9 hikes in this cycle.
I think as participants in the markets one needs to be very careful how you digest the news. Investment banks will say anything because of their sales outreach, market influence and their books. When was the last time they were right on some of their major announcements? Have they ever apologized to the markets for the wrong calls that they have made? Never. But they are a necessary evil that we need in the markets but never take their word as gospel truth.
But for the time being, we will continue to remain with our theme that we have seen the worst for the markets around Jan 24th and the equity markets will be on a higher trajectory in the coming days.
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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.