What a change of events!
Abraham George Market Musings
What a day and change in market sentiment. Yesterday was probably the biggest one-day reversal we have seen in most of the major asset classes that we follow since the COVID-19-related rally we witnessed in March 2020.
After hearing the fear-mongering from Chairman Powell on inflation continuously market participants had given up on any good news to improve the situation. So the inflation report that came in yesterday before the US market opening was a shot in the arm. Inflation is like the sword of Damocles hanging over our heads. So the best inflation report since this nightmare began and significantly better than Wall Street expectations, was a welcome sign. The market responded very strongly with open arms. Two years back most people wouldn’t even know when the inflation report was being released but now it is the most watched and analyzed economic data.
Let us be clear. The rally and the inflation data don’t mean higher-than-usual inflation is a complete thing of the past in our real world. As long as fiat currency exists and they are being printed more, one way or the other we will continue to pay higher prices at grocery stores, gas stations, and many other services.
If you have been seriously following my writings, you know very well that I have been alluding to and arguing for a turn in the four asset classes that we follow namely equities, bonds, dollars, and commodities. The reversal in equities happened on Oct 13, the reversal in the dollar was last Friday, and the reversal in bonds was yesterday. As for commodities we use gold as a proxy and the repeated attempts by gold to break below 1600 did not succeed. It confirms that gold and other metals have formed a base and are expected to trend higher. In all markets, we are seeing higher lows and higher highs and that’s the definition of an uptrend.
Yesterday’s price action looks like a regime change. Fed’s recent aggressive rhetorics on inflation and tough talks about the path of rates had resulted in a lot of strains in the global financial system. As we discussed before in the past two months or less we have seen the blow-up of UK government bonds, an intervention to defend a weakening Yen, and now the blow-up of a major crypto exchange. The ten year yields above 4% have been the cause of exposing many vulnerabilities. With yesterday’s breakdown in yields, we must have seen the worst for a while.
As I have emphasized many times before major turns in markets occur due to a market crisis, policymaker intervention, policy change via elections or regime changes, and market liquidity crises.
It looks increasingly likely with the US midterm elections they are getting a split Congress which means any new government spending will get voted down and that should be less inflationary.
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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.