Daily market Update Jun 17

Wednesday’s rally in equities post the FOMC was short-lived and we had a nasty Thursday yesterday in equities across the globe. Every sector was in red yesterday with energy (-5.6%) , Consumer Discretionary (-4.9%) and Tech (-4%) leading the way to the downside. S&P 500 (-3.25%) closed at its lowest level since Dec 2020 while Nasdaq sank almost 4%.

 Recession fears have resurfaced as the latest US economic data from building permits, housing starts, Philly Fed Manufacturing and jobless claims all showed worst economic conditions than expected, a sign that economy is decelerating faster than many economists had expected.

Price action in equities seems to suggest investors are using every small uptick in equities as a chance to reduce their positions as rallies are getting shorter and shorter. The dollar also fell as central banks in Europe stepped up monetary tightening, promising to narrow gap between rates there and in US.

 We saw move in treasuries again, this time however favouring the bulls as 10 year rates declined 5 bps to close around 3.23% amid recession fears.

The S&P 500 now implies an 85% chance of a US recession amid fears of a policy error by the Fed, according to JPMorgan Chase & Co.

The warning from quant and derivatives strategists is based on the average 26% decline for the gauge during the past 11 recessions and follows its collapse into a bear market according to Bloomberg.

 In earnings news, Adobe shares fell 5% after hours, despite beating earnings and revenue estimates. Like other large software companies, it pointed to unfavourable foreign-exchange rates (a strong U.S. Dollar) when it announced it’s latest forecast. Adobe also reduced its full fiscal year guidance.

 Central banks globally are in the hiking mode to tame inflation. Yesterday we had Bank of England hike by 25 bps to get the bank rate upto 1.25%. This was its 5th hike in a row as it looks to rein in soaring inflation. Swiss National Bank (SNB) also surprised the markets by announcing a 50 bps rate hike, first time since 2007 in a similar attempt to counter the risk of higher for longer inflation numbers. CHF strengthened almost as much as 1.8% following the release and the sentiment remains in favour of stronger swiss franc as SNB said further hikes are on the table. In the last few days we have seen hikes from FED, RBA, BOE, SNB, BOI, RBI and others.

Commentary from many of these central bankers suggests that they will fight hard to bring inflation down, even if that means sacrificing some economic growth.

However, this morning Bank of Japan continued to be the exception as it held firm with rock-bottom interest rates. The central bank kept its policy settings for yield curve control and asset purchases, according to a statement this morning. However, In a rare move, the bank added a reference to foreign exchange rates to its list of risks, following the yen’s rapid weakening to a 24-year low earlier this week. The yield on 10 year JGB’s slipped back to 0.25% or the YCC ceiling that is BOJ’s target.

 Upcoming earnings and forward guidance from companies starting July 15th will be very closely watched as so far almost all the drop in stock prices has been entirely caused by the P/E compression. Forward EPS which is still projected to grow from approx. $200 to $225 for SPX will have to live upto expectations to get the investor confidence back.

Have a good weekend!

“The secret to investing is to figure out the value of something – and then pay a lot less.”

Joel Greenblatt