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US inflation data was released on Thursday. It was already expected in advance that the values would decrease in comparison. And indeed, inflation fell, and more than expected.
The stock markets worldwide received this information with great enthusiasm, the Nasdaq even closed with +7% on Thursday. Now, one has to be very careful with such extraordinary positive days, because they usually occur in bear markets and not in stable bull markets. Nonetheless, in the event of a sustained turnaround on the inflationary side, there may actually be grounds for optimism. Since November 2021, global stock markets have been falling from lows to lows and mid- and small-cap stock indices in particular have been hit even harder. For example, the MDAX lost a good 40% from its previous high. The fact that small to medium-sized companies are more affected by rising interest rates due to the higher credit costs can also be observed on the crypto market. With FTX, the next coin after Terra was hit with a daily loss beyond the -50% mark. Since such coins can be viewed as a stake in a young startup, the crypto asset class has some things in common with so-called venture capital investments, in which investments are made in young companies. This asset class in particular is severely affected by rising borrowing costs as a result of higher interest rates. Should we have seen the peak in inflation, this would take the pressure off indebted companies and on young companies in which the credit costs cannot yet covered by the low or non-existent revenue. This hope is driving market participants back into risky asset classes such as stocks. Also, an end, or at least a curtailment, of the no Covid policy by China could ease further pressure on the inflation side. However, if the next inflation figures should go in the other direction again, then all these hopes will evaporate and probably lead to even stronger sell-offs on the markets than the purchases observed since Thursday.
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Market Review In the past few weeks, global equity markets have seen only one direction - back to the pre-Corona all-time highs. The American technology index Nasdaq 100 has already achieved this goal and set new all-time highs. Market participants and economists celebrated the end of reports of historical negative records. According to record-high unemployment data, an increase in the number of employees has recently been reported in the USA. The market participants also believed that the almighty central banks, especially the FED, were behind them. But it was precisely this FED that brought the markets back out of their delirium by merely promising to keep the current interest rate level and no cuts. The market reacted disappointed to the statement by the Fed, after which the markets worldwide went down by more than -5%. It must therefore be noted that the price recovery since the low of the corona crisis has been largely driven by the hope that central banks will intervene. This explains the high discrepancy that has arisen between economic reality, the economic outlook and the course of the financial markets. All in all, a dangerous mixture, especially when you consider the increasing carelessness in dealing with the corona virus. Market Preview It remains that a new wave of infections has to be considered at all times. The fact that the virus has already spread to the population can make the second wave far worse in speed and scale than the first wave. The second wave was by far the more dangerous during the Spanish flu from 1918 to 1920. "The second wave of the 1918 pandemic was much more deadly than the first. The first wave had resembled typical flu epidemics; those most at risk were the sick and elderly, while younger, healthier people recovered easily. By August, when the second wave began in France, Sierra Leone, and the United States, the virus had mutated to a much more deadly form. October 1918 was the month with the highest fatality rate of the whole pandemic." The fact that the first wave mainly affected older people and people with previous illnesses and then became much more dangerous due to mutation in the second wave should ring the alarm bells. It is to be hoped that such a mutation is the exception and that the events of 1918 will not be repeated.
The crash protection risk model continues to give the all-clear for the most part. The USA is still green, the signal worldwide is neutral to positive. A complete return to 100% green status would have been possible, but was prevented for the time being by the last price losses. Thus, the risk outlook remains cautiously optimistic according to the model, but the risk of renewed panic seems low. The potential for rapidly increasing markets in the short term is not very large. After the fastest 30% price drop in history, the central banks also helped the fastest recovery in history. The most serious economic effects seem to be behind us, at least according to the consensus of economists and market participants. We may face volatile sideways markets in the coming weeks and months. A further, rapidly emerging economic recovery and a return to normality could leave the markets a little more open. However, a rapid rise in the number of infections in developed countries could cause the markets to crash again. In this case, the majority of investors should expect the central banks to intervene again quickly, making a panic comparable to that in February and March unlikely. Unless the corona virus mutates ... Market Review
American and European markets have lost some ground again in the past week. Most of the indices went out of the week with slight losses of around 3-4%. There is currently no special news from either the corona crisis or the markets themselves. Market Preview The crash protection risk model has now been partially confirmed on the status green. Due to the calming of the markets that has been going on for some time now, the risk of an imminent crash appears low according to the model. However, the economic outlook has not improved, and an increase in the number of infections could quickly turn the current calm into panic. Despite a temporary all-clear, investors should continue to act very carefully in the current environment. A build-up of the equity quota can be accompanied by put hedges to protect against the scenario of sudden panic losses. In my opinion, there are still many negative records and black swans slumbering in this market
Market Review
The stock markets around the world have had another positive week. The signs that the panic is completely gone are increasing. This is despite the fact that economic data crosses unprecedented levels (applications for unemployment benefit USA, Chart 1). The corona crisis remains the dominant issue and a solution still seems a long way off. Nevertheless, the familiarization effect has set in among market participants, so that events such as the continuing high death rates in many countries (e.g. France, Italy and Spain with over 10%) and a sudden rapid increase in the numbers in Singapore no longer have any price relevance. As a result of the easing decided by local countries, there is still no negative trend in the number of new infections. In Germany, even the upcoming reopening of the first soccer league, Bundesliga, is pending. The stock markets were able to continue the almost unabated success of the past few weeks. Some of the strongest markets come from the United States, the country most affected by the corona virus. The US indices rose 4-8% on a weekly basis. In Europe the picture is mixed, on average there is a slight gain of approx. +1%. The UK and medium-sized German companies from the MDAX are particularly strong at +4%. The southern European countries, on the other hand, tend to be neutral to slightly negative. The picture is mixed in Asia too. While Southeast Asia is slightly negative, India is losing -5% and lies therefore opposite compared to the global trend. Japan, China and Australia, on the other hand, are strong Asian markets with 4-8% gains in the past week. Market Preview he crash protection risk model provides further signs of relaxation. Even if the green signal on a daily basis has not yet been confirmed, this is becoming more and more likely. In the upcoming week, the global risk status could change from red to yellow. The positive signal is based equally on the regions of America, Europe and Asia. Despite a temporary all-clear, investors should continue to act very carefully in the current environment. A build-up of the equity quota can be accompanied by put hedges to protect against the scenario of sudden panic losses. In my opinion, there are still many negative records and black swans slumbering in this market Market Review
Most stock markets have had a strong week. Almost without exception inidices moved upwards worldwide and ensured a good mood on the stock exchanges. On Thursday evening and on Friday, a public holiday, the tide turned again. Despite the losses that then occur, most stock markets are trading in the positive range of 2-7% on a weekly basis. The positive news about the Remdesivir remedy from the American pharmaceutical giant Gilead Sciences was cited as the reason. Tests have shown Remdesivir's positive effects against Covid-19. However, the proof was limited to the fact that it can significantly reduce the treatment time of the sick from around 15 to 11 days. Certainly good news with regard to impending bottlenecks in the healthcare system, but nothing more. Even the question of whether the remedy promises a greater chance of healing could not be proven. In my opinion, the news was regarded a little too positively by the market. The corona crisis remains the dominant topic. Now that many countries are releasing the lockdown, it is exciting to see how the number of new infections develops. On this website, in addition to the growth rates in the individual countries, I have now also included the change in absolute numbers. The next weeks and months seem to be accompanied by phased changes between tightening and loosening the lockdowns. This will continue until the population is either infected or a vaccine is found. Unfortunately, bleak prospects. Not only for the economy, but also for the everyday life of every citizen. Market Preview Despite the current rally, nothing changed in my statement from the previous week. In my opinion, there are still many negative records and black swans slumbering in this market, investors should continue to exercise great caution. The crash protection risk model already gives partial all-clear and provides the first green signals, which have not yet been confirmed. Since the panic is currently out of the market, you can see at least the first bullish signs on the model side. However, due to the dormant latent risks, I would prefer to build up the equity quota only by accompanied hedging instruments such as put options. Market Review
Equity markets have continued to lose momentum in the past week. Most indices worldwide are trading in a slightly negative range on a weekly basis, in most cases in the range of -1% to -4%. Brazil stands out negatively with a weekly loss of more than -10%. There, the corona crisis has led to a sudden increase in deaths in recent days. While the stock markets provided little action, the music played elsewhere on the American oil market. The US futures May contract for US WTI crude oil expired last week, reaching prices of around -$40. The sellers had to pay the buyers. This is an indication that one should not trust the current recovery of the stock markets after the violent sell-off from February to March. In normal times, oil is not negative, not even for a future contract that is about to expire. Market Preview After the corona crash sent the stock markets from their all-time highs to an approximately 30% decline within about 26 days, setting a new record that even outpaced the 59 days of Wall Street panic in 1929, the current crisis has also set a new negative record for the oil price. There are still many negative records and black swans slumbering in this market, investors should continue to exercise great caution. The occurrence of such events is a typical crash pattern. After a first panic there is often a calming down. Then events occur that nobody expected and that lead to an acceleration of panic-like sales. In 2008, this event was the Lehman bankruptcy. The crash protection risk model supports this current risk assessment, as it continues to show the status red for all regions and also globally. A look at the risk world map looked much better two months ago, where countries in green status are rarely available today. But you shouldn't think that there is no risk of a crash in these countries. A look at history shows that in phases of a crash, all stock markets fall in sync. Diversification no longer works in these times. Market Review
In the past week, the stock markets lost a little of the positive momentum of the previous week, but ultimately managed to show a slight positive performance. After some countries such as Switzerland or Germany have announced a slow return from the lockdown, other countries are still stuck in the corona crisis. Some virologists question whether it really makes sense to reactivate parts of society and the economy after just a few weeks. Others believe that the damage caused by the lockdown is greater than the one by the virus. In the end, the question arises whether damage means the death of people or economic losses. In Germany, the Bundesliga plans to resume ghost games in May. Similar plans exist in Spain, where Barcelona's coach Setién has expressed harsh criticism of these plans. The soccer club Schalke 04 is already urgently dependent on the allocation of the television money on May 2 in order not to get into severe existential troubles. Adidas has already applied for billions in loans from the DAX companies because otherwise it could not survive the corona crisis. And this already after just a few weeks. Market Preview A resurgent panic-like sales wave is currently not in sight, but could occur at any time due to an overwhelming negative event such as an unexpected bankruptcy of a significant company or an unexpected rapid rise in the number of new infections. As I already mentioned in one of my posts in the past week, the economic pressure is so great that the political aim is to return from the lockdown as quickly as possible. This has made my fear of a second wave of infection more likely. It seems to me that the strategy of a controlled epidemic is being pursued in these countries, because otherwise a month-long lockdown would cause irreparable damage to the economy. And whether a vaccine will be available at the end of this time is not even guaranteed (article by Prof. Dr. med. Dr. h.c. Paul Robert Vogt). The famous hedge fund manager Ray Dalio even gave a gloomy economic outlook in an interview. He is not talking about an impending recession, but about a depression comparable to that of the 1930s. In addition, a long-term credit cycle would currently come to an end, which would result in a realignment of the global monetary system. The positive scenario would be that the gradual relaxation of the lockdown is successful and does not lead to a new (critical) wave of infections. The economic damage will then also remain limited and the markets may recover. The negative scenario would be that the gradual loosening of the lockdown leads to sharper waves of infection and maybe even to conditions such as those in Bergamo or New York. In addition to the need for a further, possibly even longer lockdown, social and political unrest cannot be ruled out. Such discussions are already taking place in a prominent position, as the article by Barcelona trainer Setién shows. Market Review
The past week has been the strongest so far since the outbreak of the corona crisis. Equity markets gained an average return of 10% on a weekly basis, and without major setbacks. This let to hope that the lows of the crisis have already been left behind. One should be careful with such conclusions, however, since the great crises in history are repeated from interim bear market rallies. For example, from 2000 to September 2001 the DAX fell from 8000 to below 4000, recovered by 40% to 5500 points within 6 months, but then fell again by more than 50% to its final low of around 2200 points by March 2003. Regionally, the United States was the most profitable last week, followed by Europe and Asia. Over a month, the US is even slightly positive, while Europe and Asia follow in places with slightly negative values. Market Preview The past week has brought little new knowledge about the weeks ahead. The growth rate of new infections is fortunately declining in most European countries. It appears that the curve is slowly leveling off, similar to that in South Korea or China before. The next days and weeks will bring clarity. A temporary equilibrium appears to be forming in the markets, with most stock indices having passed their preliminary lows and are on the way up. It remains to be seen whether this branch is strong enough to push the markets further up, whether it slowly gives way again or even breaks off. The possible triggers for the markets are the same, positive news such as a major advance in a vaccine or therapy can accelerate the markets upward, while deterioration in infection and deaths, or especially a surprising bankruptcy of a larger company, can accelerate the downturn. According to the article by Prof. Dr. med. Dr. h.c. Paul Robert Vogt it seems that there must be doubt about the development of a vaccine. So far, it has never been possible to develop a vaccine against a coronavirus. Market Review
The last week since the outbreak of the corona crisis has been the first relatively boring week at the markets after a long while. Most global equity markets have been only slightly negative in the low single-digit percentage range since last week. The extent of the corona crisis is now known to market participants, quantitative approaches have long since reduced their positions, economists are trying to predict the economic consequences of the lockdowns and decision-makers have to weigh the risk to public health against the risk of falling into a serious economic crisis like the Great Depression. Market Preview The coming weeks are likely to be characterized by a further decline in volatility, as the first shock has passed and there are no surprises in the short term. People around the world are spellbound to see the development of infection and deaths and hope to see a turnaround and a significant decline in growth rates. This calm could still be our undoing. As Bill Gates announced in the Washington Post on March 31, a premature withdrawal from the lockdown must be avoided. Otherwise there is a risk of a second, even worse wave of infections. According to Gates, the lockdown in the US must be maintained for at least ten weeks and apply nationwide without restrictions. The same should apply to all of Europe. Since this is not the case, I fear that some countries will loosen the lockdown measures too early because of their fear of a total economic collapse. It also seems to me that in the event of an emerging second wave, testing efficiency is not as good as that of China or South Korea. It therefore seems likely to me that there will be a second wave in Europe and probably also in the USA. However, this would be the case only after 1-3 months. Until then, I expect a less volatile but yet steady decline in most markets. However, a surprising discovery of a therapy, medication or vaccine would be the starting signal for a strong recovery in the stock markets. If, on the other hand, there are unexpected bankruptcies, especially of companies with which nobody would have expected, a further sharp sell-off could take place on the markets. Market Review
The stock markets around the world showed a recovery last week and were able to gain around 10%. So far, this is just a drop in the bucket after the markets had previously slumped by around 30%. After all, the first panic has subsided, which can also be seen in the decline of the fear barometer, the volatility. In Germany this is the VDAX index, in the USA it is the VIX. Both came back during the week, but to a modest extent. With values of over 60, both "fear" indices are still at historically high levels, which investors haven't seen since the 2008 financial crisis. Market Preview How does it go from here? The camps are divided in the media. While some continue to expect a crisis that has the potential to outshine even the 1930s Great Depression, others believe in central bank support and rescue packages from various governments. Looking into history, further losses can be expected if we were to face a recession. In the majority of such historic recessions, losses did not come to stop at 25-30%. Instead, they reached levels of 50% to even 90% in the Great Depression. A recession seems inevitable to me, the only question is how much damage can be prevented by monetary and fiscal policy. However, as long as the economic cycles are interrupted due to the corona virus, these measures can only partially cushion economic damage. Or would you go out to eat in the restaurant surrounded by man people just because the government pays the bill? The further market development depends heavily on the development of the corona virus. Corona Virus Review and Preview The number of new infections continues to grow exponentially, despite the lockdowns initiated to date. However, it was clear that these measures would not take effect immediately, but with a certain delay. Since the incubation period of the corona virus is about one to two weeks, we should see a decrease in new infections over the next one to two weeks. Until then, the pressure on the health system and the people working there will continue to increase. The human drama, which after Italy has hit the metropolis of New York with great force and we can only hope that the situation will calm down soon. It is unfortunate that our species only reacts when the water is up to its neck. We actually wait until the water makes breathing difficult. A consistent containment policy, which experts had recommended weeks ago, might have put us in a position that would allow us to return to a little bit of normality today. Instead, one has to ask how long this situation will continue. Fearfully expected weeks have already turned into months. In my opinion, it would be necessary to maintain the foreclosure for a few more months. I share the view of the experts that even if we manage to flatten the curve of new infections, we should not immediately return to normal. Shortly thereafter, this would probably result in a second wave of diseases that would exceed the speed of the first wave. However, due to the political pressure from the economy I assume that this is exactly what will happen. The only hope is to find a therapy with which the disease can be treated more effectively or in the early development of a tested vaccine. These scenarios appear to be possible at best by the end of this year, probably not until 2021. Risk Model Crash Protection The Crash Protection risk model continues to show a red status for all regions and almost all countries. Security and capital preservation are top priorities. A return to green status requires a strong 20% recovery in equity markets. |
AuthorBertan Gueler, CFA Archives
November 2022
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