LiveWire

Expectations around inflation and recession should continue to drive markets. While quarterly portfolio rebalancing could be helping stocks this week, more meaningful positive catalysts from lockdowns in China, Russia-Ukraine, and if Biden is able to convince the Saudis to increase oil output could bring further gains for stocks. On the flipside, unexpected shocks such Russia blocking gas exports to Europe (would hurt Russia just as much), or renewed spike in oil or inflation expectations could bring renewed pressure to stocks. In couple weeks, FANGs earnings will be key to offer further clues to tech investors about the earnings picture and outlook given the more challenging environment. In the meantime, the source of the selloff (inflation/central banks, commodities, lockdowns, war, supply-chain bottlenecks) should remain center stage. On a technical picture, around 4'000 is the next major resistance on the S&P500. 

Growth in Europe's leading economies Germany and France is worrying investors as manufacturing data indicate a sharp deceleration in June. PMIs data showed manufacturing output in the two economies fell more than expected. Economists commented Germany's economy lost all momentum gained from the easing of Covid restrictions. Surging concerns on the economic outlook and soaring interest rates are causing a halt in the momentum. The Stoxx50 fell 1.3%, while German 10-year yields fell 15bps to 1.48%, a sharp retreat from 1.78% on Monday, factoring recession fears.

Bitcoin is still consolidating after a treacherous week hurt by the fiasco in crypto markets. On the positive, it has maintained above USD20'000, with USD19'500 being a solid long-term support level. Trading action in the last few days suggests it is still in a negative downtrend, as it remains below a descending channel. Perhaps a turn in sentiment for risky assets could fuel a rebound. 

It is difficult not to be affected by the negative headline news calling for severe deterioration in markets or the economy. However, investors continue to buy dips in the markets, and volatility (VIX) has come down to 24.4, from a May 9 high of 35, but still significantly up from where it entered the year at 16.6. Near-term risks continue to be inflation data, with a key US CPI report on Friday. But just how bad is the economy? Well, earnings from Zara's owner Inditex may surprise some. Net profit surged 80% as sales surpassed pre-pandemic levels, up 36% from a year ago. Encouraging signs from China lifting restrictions could also boost sentiment and reassure investors about global growth perspectives. But inflation needs to come down, as higher yields simply pressure valuation multiples, and the yield on the US 10-year still seats at 3%, from entering the year at just 1.6%. On a technical picture, the short-term trend remains positive for the S&P500, as long as it is able to hold above its support level at 4'076. A break above 4'189 to target 4'220 would be encouraging. 

The tech-heavy Nasdaq100 indice has fallen significantly, about 25% lower year-to-date, after a significant reversal in risk assets pressured by higher Treasuries yields and a re-pricing of lower growth from lockdowns in China, and the supply-chain crisis worsened by the war in Ukraine. On a technical level, the support level is 12’200 and if it breaches this level, it could likely continue its downtrend lower. However, there are good chances the indice consolidates from here as it has already fallen significantly. It remains to be seen and volatility should remain elevated.