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Macroeconomic Forecasts & Protests across the Developing World

Macroeconomic Forecasts & Protests across the Developing World

Prospects of Recessions and GDP Growth

We estimate that there will be two quarters with negative growth for the next 15 months. Inflation will exceed wage gains and will reduce real spending. However, a few negative quarters are not enough to claim that we have a recession.

What stops us from announcing a recession is:

  • The US strong labor market
  • Remarkably stable retail spending
  • Services sector that is surprisingly immune to interest rate changes.

JP Morgan says recession is not its base case, risky asset classes could recover:

  • we do not see (a recession) as base case over the next 12 months
  • In fact, we see global growth accelerating ... to 3.1% in the second half
  • and inflation declining to 4.2%
  • which would allow central banks to pivot and avoid producing an economic downturn

Prospects of Inflation

Powell will probably raise rates to 4%, a mere 300 basis point increase. Higher rates will be a more important matter to Wall Street, not to the Main Street. Inflation will fall back to 3%-4% once current shortage in energy and supply chains will be over. We estimated that inflation will curb in the beginning of 2023, all that is needed is prices to stop rising and an equilibrium between demand and offers.

History, indicates that long-term real rates ought to be in the neighborhood of the economy’s long-term real growth rate potential.

 

Stock Market Forecast

Regrettably, this long-term bull market is now over because interest rates will not fall in the short term and second, we will see lower earnings per share. The resulting decline in the earnings per share growth rate will shock markets. We will have a lot of companies with negative earnings growth surprises. Last decade companies have delighted investors with impressive earnings per share, but that scenario will not be repeated in the future. Investors must have a proactive investing style or to invest in instruments with large dividends. Passively investing style is dead, you can forget index style investing.

When we read our Reuters terminal last week, we were negatively surprised to see how food supply and princes affected the people of developing countries. Unfortunately, our prediction from last year has come true and we have a food crisis (just read article from November 2021 https://topfxinvest.com/blog/we-anticipate-the-food-crisis-in-2022 )

Last Month we had protests in emergent countries.

Greece

Thousands of Greeks protested in Athens against the surge in energy and food prices. Greece's annual CPI Surged to 8.9% in March, hitting its highest level in 30 years.

 

Cyprus

Protesters throw the milk in presidential palace because of high prices and production issues.

 

Chile

Students rallied against the government because of high food prices demanding price control.

 

Tunisia

Basic food (Milk Eggs Poultry) prices were raised in May and were followed by large protests.

 

Argentina

Thousands of farmers protested in Buenos Aires against President Alberto Fernandez, because of policies to contain food prices. Farmers need to pay more for animal feed and to sell at a lower price.

 

Kenya

May 17 in Nairobi was held a demonstration against the government because of cost of living and high prices of basic products

 

Iran

2000 Pensioners protest peacefully in June against soaring living costs, according to Aljazeera and social media reports. The government raised prices of some basic goods such as cooking oil, floor and meat.

 

Peru

Peru ruling class sent an army in the streets to clear road blockades of activists. Protests were launched because of rising costs of food and fuel prices.

 

Indonesia

Indonesian farmers have rallied against palm oil export ban that caused a price drop of 75% on palm oil.

 

Guinea & Sudan

Protesters were killed by the armies according to Reuter’s reporters in May. Sudan Currency lost more than 30% last year and prices for fuel and food are growing at 20%.

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Rate Hike & Recession Fears are Growing in 2022

Rate Hike & Recession Fears are Growing in 2022

The FOMC (Federal Open Market Committee) meeting consensus was for 50bp rate increase because of this week's worst CPI reading, but Fed hiked with 75bp, and market consensus agreed for other future rate increase this year, and also a 10% inflation which is on the cards right now. Markets are hit hard this week, a Risk-OFF tone was the main trading sentiment among traders.

How Dot Plot was changed:

  • June 2022 shows the median rate at the end of 2022 at 3.4%, up from 1.9% in March 2022
  • For 2023, the median Fed funds target rate is up to 3.8%, up from 2.8% in March 2022
  • In 2024, the Fed projects a Fed funds target rate of 3.4%, down 40 basis points from the end of year 2023

dot plot fed image

10 to 1 votes for 75 bp hike and Powel opening statement “Inflation is much too high” reveal large consensus and fear from actual economic environment.

Jerome Powel other key statements from yesterday meeting:

  • Consumption spending is strong
  • Housing Market is slowing
  • Tightening in financial conditions could continue to temper growth
  • Growth in business fixed investment is softening
  • Labor market is extremely tight
  • Wage growth is elevated
  • We'd been expecting to see signs of inflation at least flattening
  • We're seeing inflationary forces everywhere
  • We don't know what will happen with supply shocks and how long they will last
  • Pace of hikes will depend on incoming data
  • Does not expect 75 bps moves to be common. Either 50 or 75 bps seems most likely at the next meeting.

SP500 are at the worst levels for this year, and inflation is at the highest levels because of the Covid-19 outbreak and the war between Russia & Ukraine.
SPX 500 after rate Hike and CPI reading


Beijing and Shanghai (China) are experiencing a "strongly explosive" COVID-19 outbreak right now and this will add fuel to the fire of the Recession. Even Chinese Communist Party Media disclose some information on this new Covid-19 wave (https://www.globaltimes.cn/page/202206/1267831.shtml) but you can read more unbiased opinion at Voanews: https://www.voanews.com/a/beijing-sees-explosive-covid-outbreak-shanghai-conducts-mass-testing-/6613499.html. Authorities ordered PCR testing for all residents in 15 of Shanghai's 16 districts this weekend, and five districts have restricted residents from leaving home during the testing period.

What about recession?

Goldman Sachs SP500 forecast SP500 to 3150 according to David Kostin only if the EPS estimate moves to $225.

Morgan Stanley is looking for a "tradeable low" in the SP500 suggesting price 3,400 because "growing evidence of slowing growth and the risk to earnings”.

Our Portfolio Recommendations

Regarding our Portfolio we added some Gold this week at the price 1815 and also ZIM stock instead of Economic tailwinds. We like ZIM because they have signed new charter agreements on eco-friendly vessels to expand its services. ZIM is extremely undervalued at PER 1.83 and also, it’s a company with low debts. Company has huge cash in bank accounts of 2.8 billion $ that is equivalent to 40$ per share price. We bought at 49$ and we have a target of 75$ per share, without taking into consideration the past dividends.

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What are the Elites planning for the Future at Davos this year?

What are the Elites planning for the Future at Davos this year?

Few days ago, most influential people in the world (managers of Big Companies, top academics, leaders in main stream media, central bankers) are gathering to find paths to solve the issues on humanity crisis. Between 22 May and 26 May, Davos hosted World Economic Forum. Davos is an "invitation only" event for the "elite”. Davos it’s in essence a festivity of the ruling class. Here, the new macroeconomic trend will be set for this world, trend that will last for decades from now.

I’m not a big fan of conspiracies, but the discussions at Davos will become policies next years and we can check few strong examples:

  • “Zero interest rates policy”
  • “Mass people migration”
  • “The Abolition of Cash”
  • “Launching Electronic Currencies”

What is it about at Davos this year?

One of the main topics discussed was population migration between continents. Today, the main threat for the European Economies is the population decline, while the main issue for African continent is overpopulation & famine. Migrants coming to Europe today are not attracted by opportunities, like Golds Rush few centuries ago in US, but are attracted by: free medical services, free food for social cases, exceptional living expenses, Social Houses.

Food crisis that is coming in the next year because of the Russia conflicts with Ukraine, will determine a Mass Migration from Africa to Europe. Food shortage and how to solve this was the main topic discussed this year at Davos.

There was a massive surge of migrants to Europe in 2015. But that was just the beginning of what’s coming the next years. What we’re talking about here is the migration of millions of people of different languages, different races, different religions, different cultures, and different modes of living. Such a migration can only destroy the European culture and you can check the history back of what happened 1600 years ago in the Roman Empire, considering the migration of Germanic tribes.

A snapshot of food prices today, price are at all time high

corn futures price graph

I don’t want to beat the horses to much with people migration because other topics are also interesting, like MMT (Modern Monetary Theories). MMT means unlimited creation of paper cash to finance what governments want. This new modern economic theory must be implemented because Governments are bankrupted. Just check the US, UK, France, Spain balance sheets and debt to GDP ratio to understand how things are working now.

Countri list debt to gdp ratio

The Elite State (Davos participants) prefer to finance governments bail-out via inflation instead of imposing new taxes (it was the stock heaven in the last years).

For this reason, inflation is surging all around the Globe but they can hide this very well behind the conflict between Russia & Ukraine. Our countries economics problems are more profound than we think they are!

How to hedge against inflation?

Our options are:

  • Carbon Emissions Contracts
  • Precious Metals (good option right now)
  • Grains (too late)
  • REIT Stock’s
  • Energy Stocks (too late)
  • Other commodities like: Coffee, Cocoa, Sugar, Uranium

These days we find some options for stocks that are not in the sectors mentioned above and we want to bring you some examples here:

  • <DQ> DAQO NEW ENERGY CORP: Main producer of polysilicon to photovoltaic product manufactures in China. They have large clients in Europe, they also will open new factory in Mongolia, and the stock is extremely undervalued. 9 analysts revised their recommendations regarding this stock last month to upside.
  • <FSZ> Fiera Capital Corporation: The main investment Company in Canada that grow their AUM through acquisitions and offer 9% dividend yield.
  • <NRIM> Northrim BanCorp is the main bank in Alaska; we choose it because they have: low competition, 0 debts and Alaska will grow very much with the current Oil price.

Germany decision to stop Oil & Gas imports until the end of 2022 was in our opinion the main news at Davos and a BIG HIT to Russia. If Russia will not stop their “special operation” soon, we see this country evolving like the Nord Korea. India engagement to migrate on green energy is also a real big news that put a lot of pressure on China to change their policy also. India will change side to US-UK-EU alliance next years.

Job Market Evolution in years to come and how technology will change workers’ habits was also a good subject to meditate for the illuminated minds. Today, workers need to be more open to technologies, also work from home will be adopted by large companies. The main threat of productivity is the ability of workers to be self-organized, and discussions at Davos, was oriented on how to grow productivity in these new paradigm launched by COVID 19 disease.

Things are not going well and this was in agreement with all of the Davos participants, just to remind you some these week headlines:

  • UBS have cut their 2022 GDP forecast for China to 3% y/y, from 4.2%. Reminder, the official forecast out of China is for around 5.5%
  • JP Morgan downgrade China economic growth forecast, again. Project large contraction from -1.5% to -5.4%.
  • ECB President Lagarde has indicated July is likely lift off for rate hike
  • Fed's George says while inflation is clearly decelerating it could jump again

 

“With dedication to your freedom TopfxInvest”

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FOMC Members are seeing Inflationary Risks on Upside, in May

FOMC Members are seeing Inflationary Risks on Upside, in May
  • All participant voted for 50 basis point hike
  • 50 basis point increase is likely appropriate to the next couple of meetings
  • concerned about the risks from higher income commodity prices
  • inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. Inflation risk being skewed to the upside
  • restrictive stance on monetary policy may well become appropriate
  • Fed should move expeditiously to neutral
  • China lockdowns and Ukraine increased risks. New inflation pressures received from China as well as the Ukraine war, and were likely to weigh on economic activity
  • several thought the potential for unanticipated effects in the financial markets from the run off of the balance sheet
  • many expect tight labor market and wage pressures to continue for some time
  • Members judged that the implications of the war for the U.S. economy were highly uncertain
  • Higher wages and input prices were being passed on to consumers. Of course that will always happen
  • COVID-related lockdowns in China were likely to exacerbate supply chain disruptions
  • although overall economic activity had edged down in the first quarter, household spending and business fixed investment had remained strong
  • Job gains had been robust in recent months, and the unemployment rate had declined substantially.
  • should assess the risk the economy later this year after the rate hikes

You can read all from FED website : May FOMC Meeting 2022

Stocks Are up with 1%, because members of FOMC avoid risks of recessionary environment

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Morgan Stanley recommend SELL EUR/USD to 1.03

Morgan Stanley recommend SELL EUR/USD to 1.03

"We expect EUR/USD to continue softening in the near term, falling to 1.03 by 3Q22 and perhaps even overshooting to parity as concerns about local geopolitics and commodities intensify meaningfully further," MS notes.

However, we expect EUR/USD to begin rebounding modestly in 4Q22and into 2023, with upside driven by reduced fixed income outflows and a weaker USD on the one hand, but limited by continued geopolitical risk premium, relatively tepid growth numbers, and low relative local returns on the other hand. Further optimism on EU integration and an accelerated ECB normalization could bring EUR/USD toward our bull case of 1.14, while sub-expectations growth may keep EUR/USD under 1.10,


TopFxInvest want to take this sell trade from 1.8 because we have a confluence of resistances 0.6 Fibonacci from last swing, Horizontal line of  Resistance also diagonal trendline. Take this trade only with Risk Off sentiment or USD Strength day and manage it according to news Flow.

Alway combine Fundamental Analyses with Technically Analyses

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Economic Growth is slowing all around the globe and inflation will grow with a moderate pace

Economic Growth is slowing all around the globe and inflation will grow with a moderate pace

EU inflation is 6.1% and rate hike is mandatory. From the previously forecasted values of 3%, we have a deviation of 3% which is caused by multiple factors:

  • Russia & Ukraine conflict
  • Energy Price
  • Supply Chains disruption

Goldman Sachs also cut their US economic growth forecasts from 2.6% to 2.4% this weekend.

Slowdown in growth should help lower job openings, it is also likely to raise the unemployment rate a bit.

Blankfein former chief executive of Goldman Sachs and currently senior chairman of Goldman Sachs says "firms should be prepared for a recession this year" and also:

"We're certainly heading - it's certainly a very, very high risk factor. And there's - but, you know, there's a path. It's a narrow path. But I - I think the FED has very powerful tools. It's hard to finally tune them and it's hard to see the effects of them quickly enough to alter it."

https://www.cbsnews.com/news/lloyd-blankfein-face-the-nation-transcript-05-15-2022/

FITCH says that the global recovery is to slow down in 2022 and 2023. Policy interest rates are rising, and FITCH believes that this marks an end to an era of very low borrowing costs for governments.

Remarks from Powel has changed a lot from the last year when he considered that the inflation was transitory and some pain is needed.

“The question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control. The process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels.”

This week, CPI is lowering from 8.3% to 6% (Core CPI). This means that inflation will not decrease, it will slow the pace of growth, and the price of goods are not going to decline. The price of goods will grow with a moderate pace.

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Today CPI is a Hot Reading - Fed Officials Comment's

Today CPI is a Hot Reading - Fed Officials Comment's

Fed Loretta Mester:

 

  • Inflation might be back to around 2.5% in 2023
  • It all depends on inflation's path
  • We need to get mon pol at more neutral stance and then evaluate how much further is needed
  • We might see a couple months of unemployment rate rising but it won't be sustained
  • There's a lot of positive momentum in the economy
  • Unemployment may need to rise, may get another negative GDP print
  • I will need compelling evidence that inflation is moving down
  • We need to consider selling MBS
  • Fed's task is not going to be smooth, unemployment may need to rise to bring inflation down
  • After have point increases in June and July, Fed will have to see what more is needed based on a data in the meantime
  • I don't want to rule anything out on hikes for the second half of the year
  • Challenge for Fed is a large one

 

Fed's Williams

  • If inflation is higher an interest rate that adjusts for higher inflation is needed
  • Resolutely focused on restoring price stability
  • We have a hot labour market
  • Fed task is difficult but not insurmountable
  • Fed actions will cool demand and factors contributing to supply shortages will be resolved
  • Fed needs to be data dependent, adjust policy actions as circumstances warrant
  • As long as demand is very strong, it's difficult to resolve supply chain issues
  • You can imagine circumstances where we don't need to go much above neutral but that will be decided, we will learn on the way

 

Fed's Barkin:

  • Fed's path will not necessarily cause a recession
  • Fed needs to get inflation under control
  • Inflation is high, persistent and broad based
  • Getting inflation close to Fed's goal creates certainty that enables growth and supports maximum employment
  • Demand is strong and looks to remain robust
  • A number of pandemic-era inflation pressures will eventually settle
  • Rising borrowing rates will dampen investment levels and spending on interest-rate sensitive items like housing and cars

 

Fed's Waller:

  • We are trying to get the jobs market back to equilibrium, right now it's out of whack
  • If we get some help from supply chain resolution, that's fantastic, but won't count on it
  • Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy
  • Inflation is too high, my job is to get it down
  • This is the time to hit with rate increases, because the economy can take it

Today CPI will be a hot reading, but FED policies are changed according to data from the Economy. If will have next month's some issues with supply chains solved then it's possible to see some positive's Risk Tones in Markets  

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FOMC Lift rates with only 0.50 % as expected

FOMC Lift rates with only 0.50 % as expected

FOMC Lift rates with only 0.50 % as expected

 

0.5% increased rates were taken by Markets with lots of optimism because Powell announced 75 BP hikes off the table for next two meetings. Sentiment was RISK-ON, instead of rate increases because trader's already priced in 0.5%.

Market Evolution NY Closed: 

  • S&P 500 up 122 points to 4298, or 2.9%
  • Nasdaq +3.1%
  • DJIA +2.8%
  • DXY 0.15%
  • VIX -13%  

 

Taking out of the table 75 BP hike, for next two meetings, Powel will sustain a new bounce into risk assets but I think it's short-term (1-2 weeks) until it will have new inputs from economies. Anyways, FOMC meeting, it's a fundamental shift for Risk instruments.

In the currency markets we see movement according to the risk sentiment: AUD & NZD UP and JPY & CHF down.

 

Some important remarks from Powell press conference regarding economic statement:

 

  • Inflation is much too high
  • It's essential we bring inflation down to keep a strong labor market
  • Price pressures have spread to a broader range of goods and services
  • Wages are rising at the fastest pace in many years
  • The labor market is 'extremely' tight
  • There is a broad consensus that 50 bps hikes should be on the table at the next couple meetings
  • We are prepared to adjust any of the details or our approach
  • Lockdowns in China are likely to further snarl supply chains

 

You can read all here 

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Tomorrow FOMC Expectations from Commercial Banks & former FED official's

Tomorrow  FOMC Expectations from Commercial Banks & former FED official's

BoA (Bank of America) 
Perhaps the most interesting moment at the press conference will be his response to a question about whether a 75bp hike is on the table.

 

Barclay's 

"At this week's May FOMC meeting,we expect the Fed to lift the target range for the federal funds rate by 50bp to 0.75%-1.00%.May's hike has already been signaled to markets,with FOMC participants becoming increasingly receptive to front-loaded rate hikes amid resilient data on activity and intensified cost-push price pressures since the March meeting ... Given the broad parameters for balance sheet normalization laid out in the March meeting minutes,we expect the monthly run-off caps to ramp up from$35bn in June($20bn for treasuries,$15bn for agency MBS),to$65bn in July ($40bn/$25bn)and then to the maximum pace of$95bn/month from August.

 In the press conference,we expect much of the discussion to revolve around the speed at which the committee is prepared to lift its policy rate to neutral,with markets now pricing in 50 bp hikes in every meeting through September.We continue to expect 50 bp hikes in May and June,with the committee slowing the pace to 25bp per meeting from July onward as it sees signs of slowing inflation,"

 

Morgan Stanley  see rate hike by 50bp and SPX down to  3800 near term and 3400 long term

 

Former FED according to Wallstreet Journal "Rates May Need to Rise Quite a Bit to Get to Neutral" , he see rates to 5% 

Read entire article on Wall Street Journal

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Risk OFF tone persists, Fear is Growing & US Dollar is in Control

Risk OFF tone persists, Fear is Growing & US Dollar is in Control

Yesterday  European markets news pave the road for an EU recession in the second half of the year

Eurozone April final consumer confidence -22.0 vs -16.9 prelim

  • Economic confidence 105.0 VS Prior 108.5; revised to 106.7
  • Industrial confidence 7.9 VS or 10.4; revised to 9.0 (Heavy Hit)
  • Services confidence 13.5 VS r 14.4; revised to 13.6 

 

Euro area economic sentiment continues to fall further as the Russia-Ukraine conflict is not seems to stop

Sales are also down in Germany, March retail sales -0.1% vs +0.3% m/m expected prior was 7

Selling price expectations rose to an all-time high of 60.8 - up from 57.2 from (that is not good for inflation)

How we would expect to protect ourselves from this possible recession:

  • Bought Precious Metals Silver & Gold (Yesterday we added some silver because was a good price)
  • Bought Defensive Stocks like Gilead's, Philip Morris, Imperial Brands, TeamViewer
  • Bought some REIT stocks 
  • Bought Energy Stocks like: CNQ, PBA, ALVOF  (too late to act now on these areas)
  • Bought some stocks exposed to Agricultural land & Soils like ALCO. 

Fear is growing at Highest levels since 2008, just take a look  on CNN Business FEARS picture above 

Our real time RIsk ON/OFF indicator

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US Q1 advance GDP Terrible values -1.4% vs +1.1% expected

US Q1 advance GDP  Terrible  values -1.4% vs +1.1% expected

Yesterday, Advanced GDP was published and we saw horrible  values with -2.4% deviation from expected values. All branches of the GDB were in red.   

  • Q4 final was 6.9% annualized
  • Consumer spending +2.7% vs +2.5% prior
  • Consumer spending on durables -4.1% vs +2.5% in Q4
  • GDP deflator +8.0% vs +7.3% expected
  • Core PCE +5.2% vs +5.4% expected
  • GDP final sales -0.6% vs +1.5% in Q4
  • Nominal GDP vs up 14.3% annualized in Q4
  • Business investment +9.2% vs +2.9% in Q4
  • Home investment +2.1% vs +2.2% in Q4
  • GDP ex motor vehicles -1.3%

The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.

The Real problem for the US Economy it's not that GDP is an inflation of 8%.

Economic growth returned in the years after the 2008 recession. The US entered an era of low growth but well below previous recovery phases. That sluggish economy is why the Fed kept rates low and launched QE (quantitative Ease).Fed officials talked of letting the economy “run hot,” and tolerate a period of high inflation in order to restore long-term averages.

Covid 19 and Ukraine-Russia war is threatening to change this high inflation with hiper-inflation (over 10%).That suggests recession might be coming anyway in 2022-2023, even if the Fed weren’t tightening policy.

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Germany will ban Russian Gas after drops opposition to embargo ?

The wall street Journal announced  yesterday that Germany will drop opposition to russian oil embargo https://www.wsj.com/articles/germany-drops-opposition-to-russian-oil-embargo-11651155915?mod=Searchresults_pos1&page=1

 

That will have a huge effect on oil prices.Oil will surge if the ban will be effective this year.After the news oil climbed from 95 to 105. 

Oil climb after Germany announce Russian Embargo

 

Would be interesting if the Russian refinery (Rosneft) will process oil from Arabia. The Germany Government threatened Rosneft with sanctions if it did not process oil from other sources.

 "Should Rosneft refuse to process non-Russian oil imports, Germany could put the refinery under state management under laws protecting strategic assets," (German ministry's) 

 

German economy min on yesterday brief: 

 "Higher inflation and slower growth is the price to support Ukraine"

  • Confirms reports of 2.2% GDP growth forecast this year and 2.5% in 2023 without embargo
  • Expects 6.1% inflation in 2022 and 2.8% in 2023

 

How much economic disruption are Europeans ready to tolerate for Ukrainian people ?

Euro is already at lowest levels against the US dollar 

EURUSD Chart 29-04-2022

 

The EU expects to remain dependent on imports of Russian gas for years (two three years at least). Russia’s move to halt gas flows to Poland followed Berlin’s decision to supply Ukraine with air-defense weaponry.  Russia will cut off Germany’s gas supplies if Berlin continues to ship arms. If supplies of gas were to be cut off tomorrow, Western European economies including Germany and Italy would face a severe energy deficit and a -2% on GDP. The economic effects would be catastrophic.

A sudden stop in the flows of Russian gas would mean industrial shut-downs and chains supply disruption because of economic shutdown. Southern European governments would demand more mutual EU debt issuance to relieve the economic pain. This is exactly what Germany has spent years trying to avoid. So, expect Berlin to do everything it can to keep Russia’s gas flowing in the near term, including dragging its feet over arms shipments to Ukraine, and paying for its gas in rubles, if that is what Moscow demands. Longer terms, Eu cut-off  russian gas, will be able to colapse & disintegrate Russia. War is already lost by Russian army, because you can't subjugate a free people and a country of the Ukraine dimensions with just 250K soldiers. When blitzkrieg is lost by Russia actually russian army lost the war.

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Thoughts about the 2022 Bear Market

Thoughts about the 2022 Bear Market

I have never seen in 20 years of investing such a confluence of fundamental factors pointing to a bear market scenario for stocks like this year.

First, it was the Covid19 pandemic outbreak that disrupted the supply chains, then it was the conflict between Ukraine and Russia. We’ve seen the Oil price ranging from 0 to 150$ starting with the middle of 2020 and up to 2022.

FED Chairman Jerome Powel finds that inflation it's non-transitory anymore and the EU representatives expect 7.8% inflation this year.

The war between Russia & Ukraine also fuelled the inflationary pressure. The FED already hiked the interest rate, but The European Central Bank kept its benchmark interest rates unchanged, Australia & UK also will hike it in the following months.

Stagflation is our base expectation for this year and we’re avoiding buying Growth Stocks. We’re looking forward to start investing at lower prices.

Our recommendation for January to keep the Dividends Stocks and sell the Growth Stocks was beneficial: from year to date: 

  • Vanguard High Dividend Yield Index Fund ETF (VYM) it's up with 0.9%
  • Large Caps Ishares ETF (IVW) it's worst performing in red with -14%
  • SPDR SPX 500 (SPY) registers -7% from 1 January
  • Small Caps CORE (IJR) in red with -11,4
  • Large Cap Value Stocks (IVE) -1% near to Dividend stocks
  • Mid-Cap Value Stocks (IJJ) -3%
  • SPHB (high Beta) -9%

What is the thesis behind this evolution?

The theory is that elevated risk of high inflation and slower economic growth favour the shares with relatively rich payouts.

In a recent letter to JP Morgan Chase (JPM) shareholders, Chairman and CEO Jamie Dimon warned that the war in Ukraine could collide with rising inflation to slow the domestic economic recovery and alter global alliances for decades to come.

"They (referencing Ukraine and inflation) present completely different circumstances than what we've experienced in the past-and their confluence may dramatically increase the risks ahead. While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes."

What are our expectations for this year:

  • 50 points rate hike in the EU in May, maybe 75 points if the Energy Sector and food prices will grow much more from now.
  • The global economy, even before the rate hikes, is deteriorating far faster than the consensus expects.
  • We expect consumer confidence to suffer in the months ahead and we will continue monitoring the indices.
  • Food shortages and rising food prices can converge to a possible global food crisis in 2023 and social uprisings.
  • Globalization is dead, and also the global cooperation between the major actors: USA, Russia and China for decades from now.
  • European inflation is at the worst levels in the last 75 years - and the ECB will have no choice but to raise rates faster than the consensus expects.
  • Europe will be in Recession from the middle of 2022.

In a recession environment nobody wins but what counts is who loses the least.

According to what we mentioned above, we prefer to invest in bank Indexes in Europe, because the banks are likely to benefit from a rate increase scenario that will happen this and in the next year, and we will avoid investment banks. We acquired the EXX ETF this month.

Also, we maintain our bullish view on grains and we consider now that it was a mistake to close some of our positions in March https://topfxinvest.com/blog/we-anticipate-the-food-crisis-in-2022 

We want to close some Energy positions with profits this year on CNQ, PBR, TPZ, PIF, ALVOF.

I see carbon Emissions contracts as a very good hedge against inflation and we acquired last month CARB ETF & NETZ stock in Canada.

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Yesterday's on FOMC meting we se another 50 bps hike

Yesterday's on FOMC meting we se another 50 bps hike

 The S&P 500 is down 0.97% and the Nasdaq down 2.17%, both sliding further after the report's release of FOMC which see 0.5 hike until 4 May. Inflationary Risks have grown greatly because of Ukraine War and Shanghai lockdowns'

"Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified"

Some conclusions after March Meeting

  • Participants agreed Fed was ell placed to begin balance sheet reduction as early as the May FOMC meeting
  • All participants underscored the need to remain attentive to the risks of further inflation
  • 'Many' participants noted they would have preferred a 50 bps hike
  • Many noted that one or more 509 bps increases in the target range could be appropriate at future meetings, particularly if  inflation  pressure s remained
  • Participants noted that -- depending on developments -- a move to tighter policy stance could be warranted
  • Participants generally agreed that after balance sheet runoff well underway, would be appropriate to consider sales of MBS
  • Participants generally agreed to monthly caps of about $60B for Treasury securities and $35B for MBS

if you want to read all monetary policy's  please click  https://www.federalreserve.gov/monetarypolicy/fomcminutes20220316.htm

More comments from treasury sec Yellen about economy and Russia Sanctions 

 

  • US economy enjoying strongest job market in decades
  • Americans financial conditions overall are very strong
  • People are concerned about  inflation  and that's understandable
  • Inflation erodes ability of households to make purchases
  • Russian economy is reeling from sanctions
  • We are put in place sanctions every weekend I do believe they are working
  • It could see sky rocketing prices for oil and gas from a complete Russian export ban

 

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Fed's Brainard: Inflation is much too high & subject to upside risks but will move down by year end

Fed's Brainard: Inflation is much too high & subject to upside risks but will move down by year end
  •  I am carefully monitoring rotation from demand for goods back to services and whether that occurs without sparking inflation
  •  Expects balance sheet to shrink significantly faster than the last cycle
  •  Most low wage workers have seen wage growth that exceeds avg inflation
  •  War and covid lockdowns in China likely to extend supply chain bottlenecks and hurt growth
  •  After policy is more neutral, extent of additional tightening depends on the evolving outlook
  •  Fed will tighten 'methodically' through a series of rate hikes

Another Fed Speaks Fed's Daly: We'll be able to get inflation moving down by year-end

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FED Rate Hike by 25 Basis Points on Yesterday

FED Rate Hike by 25 Basis Points on Yesterday

The rate hike was priced in and the market was on RISK-ON mode yesterday. Main question for the FED yesterday was, what percent will be the hike?  

To stop inflation 0.5% was a better idea to hike but voters don't want to risk a recession with actual conflict between Ukraine-Russia. The surprise is 7 hikes in the dot plot instead of 5 hikes. The 10 years yield is now lower versus pre-rate decision level. Regarding the war in Ukraine, Powell said “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

Regarding the US Economy, we have below stances: “Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” You can read full press release here:


Surveying the FOMC's 18 members, the dot-plot showed that 12 FED officials predicted at least seven total rate hikes in 2022. On the high end, one FED official expects the central bank to raise rates above 3% during the year, from the level around 0.25% currently in force.

Please check below the dot plot below:

fed dot plot 15 March 12 of 18 saw 0.9% in 2022, 11 of 18 saw 1,9% into 2023 annual median at 1.6%. Median interest rates for 2024 is 2.1%

Macroeconomic implications:

Energy Financials Sectors will outperform, we consider that it's a good time to buy bank's stocks and sell High growth stocks like tech. Instead of a short term rebound for Nasdaq's & S&P500, we see down in the long run. I can't see inflation slowing down in the long term and 0.25 it's not enough to calm but the FED was forced by the actual Geopolitical climate.

Euro will be much weaker in the long run than the dollar. Unfortunately for the EU, in the Eurozone there are plenty of headwind that affect growth: price of energy, war between Ukraine & Russia.

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ECB Lagarde: See Inflation Higher 5,1% from 3,8%

ECB Lagarde: See Inflation Higher 5,1% from 3,8%

Today ECB meeting, The tone was somber, with repeated risks on lower growth and higher inflation. Risk apetite is down 👇 because Russia-Ukraine war. 

Inflation forecast:

  1.  2022 Inflation 5.1% instead 3.2% in december 
  2.  2023 2.1% vs 1.8%
  3.  2024 1.9% vs 1.8%

Most important conclusions from Lagarde meeting are:

  • Growth to remain weak in Q1
  • Growth revised down in near term
  • Energy costs pushed up Feb inflation 31% and prices have risen further
  • How long high prices will last is uncertain
  • Risks to the economic outlook have increased substantially and are tilted to the downside
  • We have risk of a loss of economic confidence
  • Path for rates will be determined by forward guidance

Conclusion according to Lagarde is  'highly uncertain'

Rate hike could come 'months after' or 'weeks after' the end of QE. Euro is forecast to be down in short term.

ECB-meeting-10march-EUR-chart

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The Russia-Ukraine War will Dominate Markets this Week

The Russia-Ukraine War will Dominate Markets this Week

After high Inflation in US and Europe, the Covid-19 pandemic outbreak, a new event like war between two major countries affected the markets. War between Ukraine and Russia pushed this morning Gold over 2000$, Oil to 124$, Soybeans 1686$ and Corn to 775$. During war times precious metals, Oil and Grains perform well instead of risk assets like stocks.

Gold pop UP!US OIL POP UP

High level of sanctions from the Western Economies will destroy the Russian economy in the medium term. The Putin regime will fall in the near future because you can't win a war completely isolated from western world and you can't govern with terror and mass-media censorship.

According to the last Russian laws, you can get 15 years in jail if you transmit information from the battlefield that is not what the regime wants. All social media are closed, also internet websites like BBC, CNN, The Guardian etc. If the Putin regime it's not quickly removed, the Russian people will live like in the North Korea.

Also, some important brands like Toyota, Ford, BMW, Mercedes, VW, Oracle, SAP, Mazda, Nike, PayPal, Apple, IBM, DELL, Mitsubishi have closed the doors to the Putin regime. The Russian currency is moving down by over 30%, and the Moscow stock market is closed for three days in a row.

With the US & EU already facing the highest inflation in over four decades, triggered by the Covid lockdowns and restrictions, and the February CPI release this week anticipated to show an escalation during the previous month, the real possibility of an economic recession is even larger.

Therefore, the Federal Reserve's upcoming policy meeting on Mar. 15-16, will start a new interest rate hike cycle and it's not advisable to be exposed on the growth stocks. We still own high dividend stocks in the energy and finance sectors and also, we are keeping our Gold & Silver positions. We anticipate further weaknesses in stocks this month.

The United States and European allies are exploring banning imports of Russian oil, Blinken said on Sunday, and the White House coordinated with key Congressional committees moving forward with their own ban.

"A boycott would put enormous pressure on oil and gas supply that has already felt the impact of increasing demand. Prices are likely to rise in the short term, with a move toward $150 a barrel not out of the question Such a move will put further pressure on global economies, pushing inflation higher, leaving central banks debating how quickly rate hikes should be implemented." according to some analysts from CMC Markets.

"The war has clearly increased the risk of a stagflation scenario for the euro zone, where you will have a stagnating economy and much higher inflation on the back of high energy prices," said Carsten Brzeski, global head of macro at ING.

We stand with the Ukrainian people that fight for their freedom and we want to help mothers with children that are refugees. Right now, we are facing a real drama on the Ukrainian border as the refugee and their children are staying over three nights on -15°C without food and water.

It's estimated that there will be over 10 million refugees this year, if the conflict does not stop soon. 

ukrainian refugees

If you want to help refugees, you can donate on these links:

https://www.unicef.org.uk/donate/donate-now-to-protect-children-in-ukraine/ 

https://donation.dec.org.uk/ukraine-humanitarian-appeal

https://donate.unrefugees.org.uk/ukraine-emergency/~my-donation

https://donate.redcross.org.uk/appeal/ukraine-crisis-appeal

https://www.icrc.org/en/where-we-work/europe-central-asia/ukraine

https://www.savethechildren.org.uk/

https://donate.careinternational.org.uk/page/100263/donate/1?ea.tracking.id=e75_orgsocial

https://www.peopleinneed.net/

https://msf.org.uk/

https://donate.unhcr.org/int/en/ukraine-emergency

You can help Ukraine Army here:

https://savelife.in.ua/donate/        

https://www.portmone.com.ua/r3/uk/terminal/index/index/id/118103/

Слава Україні! (Slava Ukraini!)

Glory to Ukraine!

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ECB Valleroy: The decision on rate hikes is not needed before June meeting

ECB Valleroy: The decision on rate hikes is not needed before June meeting
  • The decision on rate hikes is not needed before June meeting
  • Any speculation about calendar of future lift-off is at this stage premature
  • We will retain our full optionality about pace of normalization
  • Its calendar will remain a gradual, state-dependent and open in moving from one stage to the other
  • Keeping net asset purchases open ended from October would not be appropriate
  • APP purchases would end in Q3
  • another way to enhance optionality could be to remove the word "shortly" from the forward guidance on asset purchases
  • Optionality would mean that lift-off could possibly take more time if warranted

Decision on partial troop withdrawal has been taken added some optimism on markets (SP500 +1,58% NDQ +2,58) but we still have questions about inflation and growth

Oil & gold come back to previous levels

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Inflation is growing: CPI=7,5% with 0,2% over estimate - Stocks Down - Risk Off

Inflation is growing: CPI=7,5% with 0,2% over estimate - Stocks Down - Risk Off

Yesterday was a special day for trading markets because of rising in CPI. Stocks were up with over 2% percent at the start of the US session but reversed sharply with over 5%. Inflation surprised markets expectations but more interesting was FED Bullard (a voter in monetary Policy's) reaction to CPI:

He sees a 100-basis point increase by July 1.

50 BPs in March but will defer to Powell.

Would favour changing rates between meetings.

FED balance sheet reduction may require asset sales.

What is in CPI to justify the reaction above?!

Highest reading in 40 years

m/m CPI 0.6% vs 0.5%

Real weekly earnings -0.5% vs +0.1%

Core inflation:

  • Ex food and energy +6.0% vs +5.9% y/y expected
  • Prior ex food and energy +5.5%
  • Core m/m +0.6% vs +0.5% exp
  • Prior core m/m +0.6%

  1. Housing +0.7%
  2. Owners rent +0.4%
  3. Food +0.9%
  4. Energy +0.9%
  5. Gasoline -0.8%
  6. Medical care +0.6%
  7. Apparel +1.1%
  8. Services +0.4%

Only Ice scream is 👇

You can read detailed report here 

What are the reasons for these readings?

First Supply chain bottlenecks because Covid outbreak and accelerated economic growing from 2015 just look at SPX500

Citi Bank now sees 50 basis point Fed

What will happen from here?

I'm expecting inflation to peak in April-May and rates to go near to 4% in the future. Are we at the starting point of a depression?!

We intend to grow up our exposure on Gold & defensive stocks.

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