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LAST WEEK: U.S. STOCKS SINK FOR FIFTH CONSECUTIVE WEEK
Burdened by a new record inflation rate and the uncertainties of the Ukraine War, last week, U.S. equities closed down for the fifth week in a row, with tech stocks leading indexes down.
Stock prices bumped up early Friday after Russian president Vladimir Putin said there had been hopeful developments in talks with Ukraine, but sagged again later as investors recovered their pessimism.
The Dow Jones Industrial Average closed the week 2 percent lower, the tech-laden NASDAQ shed 3.5 percent, and the Standard & Poor’s 500 index cast off 2.9 percent.
By the end of last week, NASDAQ had lost 18 percent of its value this year.
The NASDAQ had been in a correction, defined as a drop of 10 percent or more from recent highs; after last week, the exchange has formally entered a bear market—a plunge of at least 20 percent from its most recent peak.
Tech stocks have taken a beating because inflation is pushing the Fed to raise interest rates, which impinge on growth stocks’ future cash flows, The Wall Street Journal explained.
The week began badly, with skyrocketing oil prices on Monday giving the S&P its worst one-day drop in more than a year.
Two days later, the index shot up 2.6 percent, its best day since 2020.
Volatility is likely to continue this week, as investors shuffle their holdings ahead of the U.S. Federal Reserve’s meeting this week.
Fed-funds futures, which traders use to bet on changes in interest rates, have priced in a 96-percent chance that the Fed will boost rates by a quarter-point this week.
In mid-February, before Russia’s war began, the market showed a 50-percent chance of a half-point hike.
Oil stocks won the week, the S&P’s only sector to end the five-day trading span in positive territory, despite a slight dip on Friday. Oil stocks finished Friday up 1.9 percent for the week.
Overseas, Japan’s Nikkei 225 dropped 2.1 percent on Friday, while the Hang Seng index in Hong Kong gave up 1.6 percent, falling to its lowest level since 2016. The Shanghai Composite index added 0.4 percent for the day, but all three indexes sank overall last week.
MONDAY: EQUITY MARKETS CONTINUE TO STRUGGLE
The Dow Jones Industrial Average rose as much as 451 points on Monday but gave up its gains to close flat, halting a multi-week slide.
However, the tech-heavy NASDAQ sank another 2 percent on worries that China’s tech sector is in for another round of flogging by the country’s regulators (see related story in this issue), in addition to ongoing concerns about higher interest rates, which the U.S. Federal Reserve is set to impose tomorrow.
The Standard & Poor’s 500 index slipped 0.74 percent on the day.
Investors are anxious over an expanding lockdown in parts of China after the COVID virus cases moved higher.
Oil stocks dropped as Brent crude’s price fell back below $107 a barrel after rising to as much as $139 shortly after Russia attacked Ukraine. West Texas Intermediate, the U.S. benchmark oil, briefly traded below $100 for the first time since 24 February.
Oil traders were spooked by China’s lockdown of the province of Jilin and the tech-centric city of Shenzhen and home to the Foxconn tech manufacturing colossus, which assembles components for Apple, Toyota, and Volkswagen, among other firms.
With its Zero-COVID policy, the province was shut down to stamp out a COVID outbreak of some 1,500 cases… and no reported deaths. With fears that this is a harbinger of a wider shutdown across China that would further slow the country’s industrial economy and reduce its need for fuel, oil prices and other commodities were sharply down.
Investors also are glum ahead of the U.S. Federal Reserve’s rate hike tomorrow.
Yields on the benchmark 10-year treasury note climbed to 2.139 percent, its highest since June 2019.
Bond-buyers are betting the Ukraine war will not dissuade the U.S. Federal Reserve from raising interest rates when it meets this week, The Wall Street Journal said.
Gold continued edging down from its 8 March high above $2,000, easing back to $1,954 Monday evening.
Bitcoin rose $1,742 to flirt again with the $40,000 milestone, trading at $39,572.
In foreign markets, Europe’s Stoxx 600 rose 1.2 percent on renewed hopes for peace in Ukraine as Russian and Ukrainian officials continued to meet.
The Nikkei in Japan closed flat and China’s Shanghai Composite index surrendered 2.6 percent, reflecting the crash of Hong Kong’s Hang Seng, which plummeted 7.2 percent Monday, its worst day since 2008.
Also rattled by a rumor that Russia had asked China to provide military aid for its war in Ukraine, the Hang Sang Tech Index, created in July 2020, erased 11 percent, its worst day since its founding, wiping out the equivalent of $2.1 trillion in value, compared to its peak value a year ago.
China denied the rumor, but traders already were skittish about China’s support of Russia’s invasion, fearing a global backlash or Russia-style Western sanctions.
Prices also caved on news that the entire mainland city of Shenzhen, a key tech center, had been shut down due to a small outbreak of the COVID virus.
In addition, the tech sector’s worries were revived by a report that Tencent Holdings, based in Shenzhen, may be hit with a record fine for violating regulations against money-laundering.
The U.S. Securities and Exchange Commission also named several Chinese firms that may be kicked off U.S. exchanges because they refuse to open their books to U.S. regulators.
“If the U.S. decides to impose sanctions on China in total or on individual Chinese companies doing business with Russia, that would be a concern,” Mark Mobius, founder of Mobius Capital Partners, told Bloomberg. “The whole story is still up in the air in this case,” he said.
Last Friday, 11 March, the Golden Dragon Index tracking American depository receipts of Chinese firms, dropped 10 per cent for a second straight day, a first in the index’s 22 years.
The index retreated another 13 per cent Monday after notching its worst weekly plunge since at least 2001.
China’s benchmark CSI 300 Index closed down 3.1 percent on Monday.
“We don’t see a major catalyst in the near term,” to boost China’s stocks, Bloomberg Intelligence strategist Martin Chen said to Bloomberg.
“For a material re-rating of China tech, we may need to see a shift in regulatory tone, and we didn’t get that from the recently concluded NPC meeting,” he noted.
The MSCI China Index has lost half its value since peaking in February 2021. The index is trading at about nine times its 12-month forward earnings estimates, compared to its five-year average of 12.6.
“It’s true that the valuation is cheap but if you are desperately closing your positions, valuations don’t matter,” Yasutada Suzuki, head of emerging market investments at Sumitomo Mitsui Bank, said in a comment quoted by Bloomberg.
TREND FORECAST: The art of tracking trends is the understanding of the current events forming future trends: where we are and how we got here to see where we are going.
No one can predict the future. There are too many wild cards, be they man-made or by nature.
Beyond the man-made Ukraine War wild card that was dealt last month, the latest wild card has been played in China and one element, the lockdowns to fight COVID is definitely man-made… and we are not sure if nature, man, or both, had a role in the creation of the coronavirus.
In Jilin, with a population of over 24 million, the people are not allowed to leave the province or travel between its cities. And since Friday, residents in the province’s capital Changchun, have been locked down and authorities conduct repeated rounds of mass testing. And Shenzhen, the high-tech production city that’s adjacent to Hong Kong, residents have been in lockdown since Sunday.
Therefore, should history repeat itself, just as the world shut down following China’s lockdown-mandates when the coronavirus broke in the city of Wuhan back in January 2020, should they again embrace the Chinese way, oil and other commodity prices will continue to sink… as will the global economy.
Bonds up
Yields on the benchmark 10-year Treasury note climbed to 2.139 percent, its highest since June 2019.
Bond-buyers are betting the Ukraine War will not dissuade the U.S. Federal Reserve from raising interest rates when it meets this week, but the question still remains whether they will raise interest rates 50 basis points or just 25 basis points as a result of the War.
Gold continued edging down from its 8 March high above $2,000, easing back to $1,954 Monday evening.
Bitcoin rose $1,742 to flirt again with the $40,000 milestone, trading at $39,572.
In foreign markets, Europe’s Stoxx 600 rose 1.2 percent on renewed hopes for peace in Ukraine as Russian and Ukrainian officials continued to meet.
Markets Today
As fears of the new coronavirus spread heightened along with the expectations of stricter lockdown-mandates, it wasn’t a happy day in the Asian market sector.
While Japan’s Nikkei 225 inched up 0.15 percent, across the Asian spectrum equities closed down. South Korea’s Kospi lost 0.91 percent, Australia’s S&P/ASX 200 fell 0.73 percent and the hard hit Hong Kong Hang Seng index dove 5.72 percent to close at its lowest level since Feb. 2016… while China’s Shanghai composite and Shenzhen component fell 4.95 percent and 4.363 percent respectively.
It should be noted that the fear of Zero-COVID China policy sank equities despite better than expected data showing that industrial output rose 7.5 percent year-on-year in January and February, and retail sales for the first two months of the year jumped 6.7 percent in January—more than double what the Reuters poll expected.
In Europe, with the exception of the FTSE MIB International which was slightly up 0.15 percent, the pan-European Stoxx 600 closed down 0.5 percent.
Back in the States, on the news of sharply falling oil prices and a lighter than expected inflation number, the S&P 500—still some 12 percent from its record—registered its first gain in four days moving up 2.1 percent, the Dow jumped 599 points, and the Nasdaq Composite climbed 2.9 percent.
On the inflation front, the producer price index rose 0.8 percent in February, a bit lower than the 0.9 percent Dow Jones estimate. But the Headline Producer Price Index spiked up 10 percent from a year ago, registering one of its biggest gains ever… and this is before sanctions have been put on Russia, which is expected to drive prices yet higher.
And while crude oil prices have fallen sharply over the past few days, gasoline prices surged more than 14 percent, which helped fuel the biggest single-month increase for final demand goods prices going back to 2009.
GOLD/SILVER: Despite gold futures trading to an intraday high of $2078 last Tuesday—just $10 below its $2088 all-time high it hit back in August 2020—with The Street focused on expectations that the Federal Reserve will tighten monetary policy and raise interest rates tomorrow, gold prices have sharply retracted.
Today, gold prices fell $35.90 to close at $1918.00 per ounce and silver was down $0.21 to close at $24.88 per ounce.
TREND FORECAST: With inflation at its highest levels in 40 years and escalating sanctions on Russia which are expected to drive inflation yet higher—plus increasing geopolitical tensions with Russia and Ukraine and Israel and Iran—we maintain our forecast that gold and silver will dominate as the predominant safe haven assets… far above cryptocurrencies.
As seen by the recent upward spikes, the higher geopolitical tensions rise, the higher inflation rises, the deeper equities fall… the higher precious metals will rise.
OIL: Building on Monday’s steep decline, oil continued its down-trend, registering heavy losses mostly on the concerns of an economic slowdown in China. Down more than 27 percent from its recent high, Brent Crude fell 7.61 percent to close at $98.78 per barrel and West Texas Intermediate slumped 7.69 percent to close at $95.35 per barrel.
TREND FORECAST: While the business media also cites pending talks between Ukraine and Russia as a reason for oil price’s decline, we disagree.
Talks or no talks, the sanctions put on Russia by the U.S. and the cutting off of much of Russian gas and oil to Europe, will not be reversed if Ukraine and Russia come to a cease fire agreement.
What will drive oil prices down much further is a sharp slowdown of economic growth which may escalate if the world again mirrors China and locks down nations to fight COVID War 2.0. What will drive oil prices much higher is if Russia is attacked by Ukraine and/or the Israeli/Iran conflict intensifies. Should oil prices remain in the $125 per barrel and above range for several months it will bring down economies and equity markets… as it did at the onset of the Panic of ’08.
More Oil Coming
The International Energy Agency’s (IEA’s) member nations are ready to release more oil in an attempt to tamp down the price surge brought on by Russia’s war in Ukraine.
The 60 million barrels tapped by agency members earlier this month was an “initial response” to the oil market squeeze, IEA executive director Fatih Birol said in a statement, and members will do “everything” to rein in oil prices, which leaped to $139 a barrel shortly after Russia’s invasion.
The earlier release failed to lower prices but slightly increased them temporarily; traders had expected a more generous flow from stockpiles, the Financial Times reported.
“We are ready to release as much oil as is needed,” Birol said in an FT interview, noting that 60 million barrels is just 4 percent of members’ total strategic reserves.
Also, “we are in touch with several producing countries who behave more responsibly than others,” he said, a subtle criticism of Saudi Arabia, the United Arab Emirates, and some other Middle East countries that have refused to pump more oil to soothe the market and bring prices down.
These nations have production capacity standing idle but have remained within OPEC’s decision this month not to exceed current production levels, which we reported in “OPEC+ Refuses to Pump More Oil Despite Shortage, Soaring Prices” (8 Mar 2022).
TREND FORECAST: Nations may release more oil from their reserves but also must maintain certain levels to ensure their military security.
Therefore, the releases will not be large or sustained enough to make a meaningful difference in oil prices.
Prices will come down as production rises. As the market continues to be tight, U.S. producers will be lured back into production and the U.S. and other nations will seek new supplies in unlikely places, such as the “U.S. beginning negotiations with Venezuela” to lift the embargo on its oil.
BITCOIN: On the bitcoin front it is more of the same and not much new. Last week the cryptocurrency was trading at $38,667 per coin. Today, as we go to press, the coin is at $39.634.
TREND FORECAST: As we have been noting for over five years, a major factor in forecasting the future price of bitcoin and other crypto currencies is dependent upon government.
(For more crypto trends and forecasts, please see our TRENDS IN CRYPTOS section.)