After a brighter start to the new week, it was more of the same since the European markets opened. US index futures have turned negative, along with European indices as investors continue to shun risk. Indeed, it is not just stocks that are taking a hammering. Cryptos, commodity dollars and emerging market currencies were also sharply lower.
The key question is this: will the sentiment turn positive any time soon? It is impossible to say, but we do have the Fed meeting this week and there is a chance Jay Powell may talk down the prospects of aggressive tightening. What’s more, the upcoming tech earnings could lift the mood after what has so far been a weak start to the reporting season. Additionally, the spread of omicron in Europe appears to be slowing and governments have reduced travel restrictions, while workers in the UK have been encouraged to go back to the office. So, we may see some improvement in the economy in the months ahead.
But for now, the trend is clearly negative. The loss of appetite for risk comes on the back of overindulgence last year. This year, investors have realised that the era of zero-interest rate policy is coming to an end faster because inflation is soaring. On Wednesday, the Fed is widely expected to provide the clearest signal yet that the first rate hike since 2018 will be coming our way in March.
What’s more, tensions around Ukraine and a relatively poor start to the US fourth quarter reporting season have not helped sentiment whatsoever. It is unquestionable that the sell-off has been turbo-charged because of technical selling as more and more support levels have broken down in popular stocks or indices.
Speaking of which, the Nasdaq has just broken below yet another support: the October 2021 low of 14380ish ahead of earnings from Microsoft, Tesla and Apple:
Source: ThinkMarkets and TradingView.com
With the Relative Strength Index at oversold levels of sub 30, I wouldn’t be surprised to see some “bargain hunting,” possibly as early as today or this week.
If we do see the indices such as the DAX and Nasdaq come back strongly here, I would like to see the formation of a strong hammer candle such as the one I have drawn on the chart.
The South African Markets in Focus
By Kearabilwe Nonyana
The market volatility is on the rise. We are seeing risk aversion across global markets, with weaker US earnings contributing to the sell-off. The SA market sold off Friday, making it a flat week overall, but more losses have followed at the start of this week, along with global markets. But our local market performance has been relatively better than most other regions. This is the first time I have seen such a sizeable dislocation between global and local markets. I think this speaks to the value which still needs to be unlocked in the SA market. In recent times, great earnings from companies on our market have given confidence to investors.
MPC rates decision
The MPC is in the process of convening their first meeting this year. It will be a very interesting meeting as the backdrop of the monetary policy direction of the whole world has changed. In recent months, the US Federal Reserve chairman Jerome Powell has backtracked on his “transitory” inflation rhetoric, acknowledging that it might be structural. The headline CPI numbers for December of 5.9% was the highest since 2017. My concern has always been that inflation has not been demand-led from excessive credit extension or higher rates of wages. This is a supply-side disruption, which has led to input costs being higher and therefore driving the price of goods northwards. Do I believe an interest rate hike will in anyway ensure price stability? I think no because most of the inflation which is being created in our Economy is not driven by credit. The SARB has shown that they like to be ahead of the curve by pre-empting future inflation, and therefore adjusting policy before raising rates. The SARB has members who are hawkish in nature, and I believe they would be more aggressive in raising rates. I anticipate a rate hike of 0.25%.
Headline CPI and expectations
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