The selloff throughout the financial markets reached its pinnacle, and now investors have found a bottom. It is time to hit the buy button and overleverage your brokerage account. No, wait. Never mind. Hedge funds are dumping shares, and the Wall Street Bets army is unleashing its puts. In other words, the New York Stock Exchange is drowning in red ink. But what is that 250-point rebound on the Nasdaq Composite Index from the other day? By now, it’s clear nobody will be able to determine the direction of the financial markets, especially with the Federal Reserve tightening its belt and raising interest rates. But we can at least try to grasp what is occurring day-to-day, and this is what Ipek Ozkardeskaya, the senior analyst at Swissquote Bank, offers armchair investors: Information.
It’s a Mad, Mad, Mad, Mad World
It has been a compelling start to February. The January jobs report was better than even the White House anticipated, while the inflation numbers were much worse than everybody expected. Consumer sentiment weakened to an 11-year low, but corporate earnings were impressive for many of the darlings on Wall Street, from Microsoft to Amazon. Meanwhile, the financial markets are in a state of panic over Russia-Ukraine geopolitical tensions, energy commodities are skyrocketing, and gold prices are holding steady despite the prospects of rate hikes that raise the opportunity cost of holding non-yielding bullion.
With earnings season close to being in the rearview mirror, there is “little to look forward to,” explained Ozkardeskaya in an interview with Liberty Nation.
“The end of this earning season will leave investors with little to look forward to, or little to find something that they could hold onto as the next steps are the Fed hiking interest base and threatening its balance,” the veteran market analyst said. “So, depending on the data – and the data doesn’t look good for inflation, obviously – and how the Fed expectations will be shaping, we may actually not have reached a bottom in the major U.S. industries in January, and the sell-off could well continue.”
Investors will be keeping a close eye on the next Federal Open Market Committee (FOMC) policy meeting in March, with the debate coming down to either a 25- or 50-basis-point hike. But there are doubts among many market analysts that even a half-a-percent increase to the benchmark fed funds rate will douse the sizzling inflationary environment.
Marriner S. Eccles Federal Reserve Building (Kent Nishimura / Los Angeles Times via Getty Images)
“We also know that high interest rates won’t necessarily resolve the supply chain problems and the energy crisis that have been most responsible for the rising inflation in the U.S. and elsewhere,” Ozkardeskaya noted. “So, there’s only this much the Fed could do about it. But go tell this to your hawks.”
Recent data show that hedge funds have been engaging in some short-selling, potentially trying to get ahead of the Federal Reserve, which has been behind the curve on so many subjects since the start of the coronavirus pandemic. But if the Dow Jones or the tech-heavy Nasdaq stage modest rebounds, who is buying? Could it be the Robinhood men in tights or the Reddit members buying the dip?
In this environment, it can be challenging to determine who is driving the current market conditions. However, to Ozkardeskaya, the hedge funds “still keep the power in their hands to run ahead of the market.” Of course, she added, the GameStop and AMC saga revealed how “small players could get these hedge funds to their knees.”
‘Xi Daddy’
Have the panda bears come for the Chinese financial markets? The Shanghai Composite Index has slumped about 5% year-to-date, although it rallied 3% in the last week. The Shenzen Composite Index was flat for the week, but it is down more than 10% so far in 2022. With some modest buying in the aftermath of the week-long Lunar New Year festivities, can Beijing avoid a sharp and sustained correction this year?
Indeed, the sentiment on China has shifted in recent months, driven by the country’s stubborn COVID Zero strategy, the Evergrande debacle, and ubiquitous stagflation concerns. Although it might be easy to suggest a downturn in the Chinese financial markets is imminent, Ozarkdeskaya purports that analyzing markets in the world’s second-largest economy is different since it is a communist regime that possesses a wide range of interventionist tools and different fundamentals.
In other words, if President Xi Jinping wants to create a million jobs overnight, the Chinese Communist Party (CCP) would find these folks and do “all kinds of little jobs to keep people away from being jobless.” Inflation might be a little bit different, she noted, but “Xi Daddy is still here to keep things under control in China.”
(Photo Illustration by Sheldon Cooper/SOPA Images/LightRocket via Getty Images)
Ultimately, according to the Swissquote Bank market observer, after plenty of brand-name Chinese stocks got hammered by “Xi Jinping’s common prosperity measure,” there could be a buying opportunity for domestic and foreign investors.
“So I think that besides the stagflation and the monetary and fiscal policies, and all the pandemic-related issues, what really matters more for investors and for appetite in Chinese markets is, whether this common prosperity will keep pulling the rug from under the Chinese stocks’ feet, or whether it’s over and investors could now lightheartedly go back to the Chinese stocks,” Ozkardeskaya stated.
Watching the Market Like a Hawk
In the historic pandemic-era bull market, anybody could have made money since nearly every security was at or near all-time highs. In 2022, conditions will drastically change: rate hikes, the end of asset acquisitions, and the shrinking of the $8.8 trillion balance sheet. Put simply, less liquidity is being injected into the equities arena, leaving investors – institutional and retail – to engage in good old-fashioned balance sheet investing, absquatulate to Treasurys and the U.S. dollar, and pour into inflation hedges. Whether the Fed will be aggressively tightening or remaining as cautious as germaphobes, the Eccles Building will be steering the ship. But will the boat stay above water or sink to the bottom?
~ Read more from Andrew Moran.
