Three horsemen of the apocalypse have arrived: war in Europe, plague in Asia and interest rate hikes in the US. The market’s reaction: shrug your shoulders and keep buying the risky stuff.
It is almost unbelievable that European equities have now fully recovered from the shock of the Russian invasion of Ukraine. The Stoxx 600 index fell more than 10 percent from just before the invasion in late February to its low on March 7. It is now right back where it started, after the biggest weekly rally since late 2020. Much the same is true for Germany’s Dax, which fell even harder and is now close to the starting point again.
This is despite an overwhelming consensus that the EU economy will suffer, potentially severely, from the war next door, largely due to the effects of painfully high energy prices. Goldman Sachs, for example, has lowered its growth forecast for the year from nearly 4 percent before the war to 2.5 percent now. But it seems the evolving narrative that the war in Ukraine will lead to greater cohesion in the EU and, crucially, higher government spending on defense is winning the day.
In Asia, this week brought a rather depressing reminder that Covid-19 is not over. On Monday, Chinese stocks in Hong Kong had their worst day since the global financial crisis, falling more than 7 percent after authorities announced a six-day shutdown in Shenzhen to stem another outbreak of the coronavirus.
Analysts at ANZ calculated that just a week-long close in the region could reduce to 0.8 percentage points of growth for the year. It is clear that the road back to functioning global supply chains will not be smooth.
To make matters worse, investors worry that China will soon have to choose a clearer side in the conflict in Ukraine. “There is a concern that China will somehow become mired in sanctions,” said Ron Temple, head of US equities and co-head of multi-asset at Lazard Asset Management.
But again, fast-forward to the end of the week and China’s stock markets are back to business after Liu He, the closest economic adviser to the Chinese president, promised measures to stimulate the economy along with unspecified “policies that are beneficial.” to the market.” Details weren’t immediately known, but it doesn’t matter – investors can see a big dollop of additional monetary or fiscal stimulus from 50 steps.
And of course, the US Federal Reserve eventually did. It raised interest rates for the first time since 2018, with a quarter-point rise likely to be just the first of several over the course of this year.
The feared end to monetary stimulus has been hanging over riskier assets for months. But in the end, the S&P 500 index shot more than 2 percent higher on Fed day and just kept going from there.
The Nasdaq Composite, crammed with exactly the high-tech stocks deemed most vulnerable to tighter monetary policy, has had its best week in a year. Sure, it’s down nearly 13 percent so far in 2022, and the Goldman Sachs index of unprofitable technology stocks is still down about 60 percent this year. But a 6.5 percent gain on the Nasdaq in a week is not to be missed.
“I still think some speculative technology stocks in the US are overvalued,” said Lazard’s Temple. “But there are still strong arguments for US equities. Perhaps we will let the profit grow in line with valuations in the coming years.”
The game has changed; tracking indexes higher and calling yourself a genius is a trick that’s worn thin. According to Michael Kelly, global head of multi-asset at PineBridge Investments, investors have “overdosed” by sticking to broad stock indices in recent years.
By brushing aside blunt rate hikes, the Fed’s process of reclaiming the $9 trillion balance sheet it has built to boost the financial system will be tricky to navigate, he notes. “It’s very difficult for the markets to lead it,” he says. “I don’t believe the ‘priced in’ story. I don’t believe it can be priced in.” Exploiting niches rather than following the herd will be important from here on out, he says.
Still, investors are clearly determined to pick out the positives. In a note this week, Credit Suisse’s investment committee said it had decided to move to an overweight position in equities after an ad hoc meeting.
The benign response to the Fed’s rate hike suggests that “the markets have had enough time to process the changed economic outlook,” it said. “Glimpses of hope” have emerged about a ceasefire in Ukraine, it added. And a slump in commodity prices suggests that the Russian shock “could enable the global economy, including Europe, to remain on a solid growth path”.
Analysts at UBS Global Wealth Management said the surge in US stocks since the Fed’s meeting shows “how quickly markets can change investor perceptions of geopolitical risk.”
“It also reinforces our view that simply selling risky assets is not the best response to the war in Ukraine,” they said.
In short, markets are about how fears match reality, and everything could have been worse. Let’s hope this doesn’t tempt fate.
This post Markets soar as bad news continues to pour in
was original published at “https://www.ft.com/content/3c6d1d2c-f186-4718-99a8-7e2f178f7b80”