Stock market analysis: reflation vs. stagflation
The S&P 500 did not give in to the weakness at the opening and fought for smaller gains. There were also no sales until the very end – the table looks like the mess continues on Monday. Tech and value – uninspiring on this day, the same goes for the credit markets. Rising yields (the market seems to believe in tapers) across the board, with high yield corporate bonds holding up much better than high quality debt – I’ve seen stronger risk constellations really.
Importantly, the huge weekly surge in government bond yields (the 10-year yield jumped over 20 basis points to 1.47%) failed to lift the dollar, which says a lot given the risk-free start to the week. Meanwhile, the Fed goes on, and the overall picture makes the ambitious November suspect.
At the same time, the Fed’s foot is largely off the accelerator, and even global liquidity is shrinking. New taxes come into effect, labor market problems persist, inflation will not go away anytime soon, challenged supply chains are forcing globalization to reverse, the workforce is falling, GDP growth is slowing and there are no new fiscal initiatives in sight – Sounds like a recipe for stagflation.
As I wrote Friday:
(…) The post-Fed relief simply took the bears for a little ride, and the repayment of the Evergrande yuan bond eased the nerves. As if the real estate sector was generally healthy – I think the price of copper and BHP share price tell a different story. Despite the arrival of the PBOC, there will continue to be interest. The current macroeconomic environment will be very difficult to tighten (economically and politically) – did you notice that the Turkish central bank unexpectedly cut interest rates?
Precious metals should love the increasingly negative real interest rates and the associated financial repression. Commodities and real assets will do well over the long term, and stocks would enjoy themselves most during the reflationary period, the early phase of inflation when everyone benefits and no one pays. Despite all of the inflation in the real world, we have not yet entered its nasty, late stage.
Let’s jump straight into the charts (all courtesy of www.stockcharts.com).
S&P 500 and Nasdaq outlook
Friday brought a daily break in the upswing – however, the bulls did not give in to sellers during the day.
High yield corporate bonds fell less than high quality debt, which appears to have seen a bit of a steep downturn. However, the non-confirmation of the stock exchange price is hardly visible.
Gold, silver and miners
Gold has held up despite the steep rise in yields, but miners are becoming more and more undervalued – if you are a long term investor these are very interesting prices across the PM sector. Silver continues to trade at odds with copper, and both metals (including a few more) are needed to transform the green economy.
Oil stocks paused on Friday and the oil surge is likely to be next. However, energies remain bullish and dips are for sale.
Copper closed at weekly highs but hesitated against the CRB index. All is not well when you look at BHP (or FCX) which is a proxy for copper and China.
Bitcoin and Ethereum
Bitcoin and Ethereum have recovered from the Chinese crypto trade raid and continue to successfully fend off the bears.
Risk-on was not dethroned on Friday, but it wasn’t convincing either. Apart from selected raw materials, there was no strong growth. Wait on the low volume day – one that’s likely to carry over to Monday. Risk-on assets still haven’t turned the corner (no regaining the 50-day moving average) and the VIX below 19 is slowly approaching the lower bound of its most recent range, meaning that volatility will surprise us again shortly can.
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All articles, research and information represent analyzes and opinions of Monica Kingsley based on available and latest data. Despite careful research and best efforts, it may prove incorrect and is subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or completeness of the reported data or information. Their content is for educational purposes and should not be viewed as advice or recommendations of any kind. Futures, stocks and options are financial instruments that are not suitable for every investor. Please note that you invest at your own risk. Monica Kingsley is not a registered securities advisor. By reading her writings, you agree that she will not be held responsible or liable for any decisions you may make. Investing, trading and speculating in the financial markets can carry a high risk of loss. Monica Kingsley may have a short or long position in securities, including those mentioned in her writings, and may additionally buy and / or sell such securities without notice.
The article Equity Market Analysis: Reflation vs. Stagflation was first published on FinanceBrokerage.