The S&P 500 (SPX) has recovered +7% from the intraday low on 2/24 as momentum divergences triggered short covering and option dealer gamma hedging. Yesterday’s strong advance followed incremental clarity on Fed policy, while equity market volatility remains dependent on Russia/Ukraine headlines.
The sanctions enacted against Russia have already taken a massive toll on the country. Russian companies are unable to access capital, financial markets have been closed and the ruble has lost ~40% of its purchasing power.
Higher commodity prices are driving inflation breakeven yields higher, while risk-off positioning pressures nominal yields lower. The combination has taken 10-year real yields to -0.95%, which is back below the -0.89 trigger we used to signal the potential for multiple compression in expensive Tech stocks
Recent events in Ukraine are more dramatic than what we initially assumed. The impact to financial markets comes through higher commodity prices, also reflected in today’s 8bps backup in 10-year inflation breakeven yields.
It’s very common for equities to rebound after a sharp/sudden correction. Since 1990, the average rebound from a ~10% correction has lasted ~13 sessions before pausing, pulling back or retesting lows.
The Euro Stoxx 50 (SX5E) and Hong Kong’s Hang Seng (HSI) index are positively correlated with US value sector performance. The SX5E is also in bullish consolidation mode, but outperforming the S&P 500.
The consensus narrative expects sustained growth would only encourage the Fed to hike more until the inevitable policy mistakes create a recession. But that narrative ignores the relatively high probability for the Fed to engineer a soft landing. Excess monetary accommodation is responsible for most
Markets are fairly quiet today and likely to remain that way until Thursday morning’s CPI report. Higher energy prices throughout January have markets braced for another uptick in headline and core CPI.
We recently shifted our yield curve focus from the 5/30-year spread to the 2/10 spread to account for rising concerns of a potential Fed policy mistake. A ‘policy mistake’ occurs when Fed rate hikes cause a recession.
Today’s data will lead to increased weekend reports of rising inflation expectations. But since January 3, inflation expectations as measured by 10-year breakeven yields have declined from ~2.65% to ~2.39% today.
