Investability bulletin 29/03/22: Upside Down

Risk assets are shrugging off signs of recession

Photo by Annie Spratt

Inversion…the US 5-year Treasury yield briefly rose above that of the 30-year bond for the first time since 2006. Rates today are steady with the US 10yr under 2.5%, its spread with the 2yr note down to just 7bps. But the inversion is coming…does it mean recession for the US, as history suggests it might?

Crazily, European yields are not giving such strong recession vibes. “While the rates curve was one of the best leading recession indicators historically, recessions usually don’t start before inversion and the market typically peaks only a year afterwards,” says JPMorgan chief global markets strategist Marko Kolanovic. 

Risk assets were buoyed as hopes for peace grow somewhat as Russia dropped its demand Ukraine be “de-Nazified” and said it is prepared to let Kyiv join the EU as long as they stay militarily neutral. Talks continue today in Turkey, but stocks continue to show signs of optimism as European bourses made further advances after a solid day for Wall Street. Tech stocks popped despite rising rates, still defying gravity. Tesla rallied 8% after announcing a stock split…the FTSE 100 trades near yesterday’s highs at 7,540, whilst the DAX in Frankfurt rose to its highest in a month. 

Retail investors are buying the dip (we’ve previously looked at what is driving the rally against the macro backdrop…buybacks is the major driver, but retail investors are also loading up). GS is out with a list of retail favourites that includes Nio, AMC, Peloton, Tesla, Nvidia, Apple, Amazon, Netflix, Alibaba Group and Uber. In other words a lot of beaten down tech that it thinks may have been oversold. Nvidia is up nearly 13% this month and returned 32% between March 14th and March 24th, notes CNBC. Still GS is cautious amid the ‘more challenging macro backdrop’. 

Hopes of peace and worries that lockdowns in China will drive down demand for energy has kept oil prices in check, despite OPEC is signalling it won’t budge on output and Saudi’s energy minister saying that they “leave the politics outside of the door”. Prices slumped overnight as a new lockdown in Shanghai raised fears that demand will be affected in the world’s largest oil importer. The scale of the pullback for oil futures pointed to fears that lockdowns might spread to other cities. Brent fell under $110 to trade at its lowest since March 18th. Meanwhile G7 nations have rejected Russian demand to pay for fossil fuels in rubles. 

In FX land, eyes remain on the Japanese yen, which has come under immense pressure lately. After spiking at 125 yesterday, USDJPY has retreated to 123.60 area since the Bank of Japan’s offer to buy unlimited amounts of 10-year JGBs at 0.25% for the first four days of this week. The yen has been under pressure in large part because the BoJ’s yield curve control policy has kept its benchmark 10yr paper to within a range of 0.25%, whilst global bond yields have broken out.  

On the data front, US JOLTS job openings and consumer confidence data will be the ones to watch. 

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