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China Markets the Good, the Bad & the Ugly

China Markets the Good, the Bad & the Ugly

The Good

Stimulus and a looser monetary policy help China to have a solid COVID-19 recovery with moderate inflation, much lower than the European and US nations. China's interest rate is on a long-term downtrend, which could create attractive opportunities for fixed-income investors.

China markets have extremely low valuations, just think that Hang Seng lost more than 50% from all time high, and its price is similar with the 1997 levels.

Valuations are attractive and they are poised for a rebound if China’s growth recovers.

China Hang Seng Chart

In a Twitter post, the hedge fund manager Michael Burry said:

“The Hang Seng recently hit 1997 levels. 25 years. Yet GDP multiplied 18 times during that time. 1997 valuations were 20 Earnings, 10x EV/Sales, 3x Tangible book. Now 7/1/1.”

Most of the global investors are underexposed to China, while China's communist party makes efforts to access foreign capital markets. The Chinese economy represents approximately 18% of the global GDP, but China A-share market only comprises 1% of the global MSCI index.

China’s economy is green energy-efficient oriented.

Efforts in seeking to achieve carbon neutrality and energy reform have the potential to create additional investment opportunities, given China's leading position in wind and solar components and materials. China is a global leader in the renewable power industry and has established a clear policy commitment in support of climate transition and the protection of natural capital.

China is on track to meet its 33% electricity consumption target from renewables by 2025 and could comfortably exceed it amid ongoing efforts to debottleneck the power grid to accommodate more renewables, analysts and clean energy project developers said.

https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/energy-transition/092322-china-could-exceed-renewables-generation-target-of-33-by-2025

The Ugly Part

97% of Chinese provinces are spending more than they are receiving back in tax revenue.

The Chinese real estate market is in collapse. Real Estate Market was a major source of revenue for government few years ago. Land sale revenues are down 29% relative to last year while roughly 7.1 billion square feet of housing has been sold this year, the lowest amount since 2015.

China Budget freefall. Just check below the chart of Budget balance in relation with GDP.

China deficit percent of pib

Regarding the consequences, companies are fined for nonsense and illusive reasons because the China government look for ways to create cash flow through taxes and fines at the civilian level.

A vegetable vendor was fined 66,000 (9538 Euro)Yuan for selling subpar celery.

Source

http://global.chinadaily.com.cn/a/202208/30/WS630d561da310fd2b29e74de0.html

The Bad

Economic Growth for 2022 is revised down from 5.3% to 3.5%.

Taiwan Tensions with the US. War between Russia and Ukraine it’s catalyst for Chinese Communist party to invade Taiwan and that is a major concern for investors. Government bet that it will be difficult for US to economically sustain two fronts. Putin met with Xi Jinping multiple times before war with Ukraine. I personally don’t think China will invade Taiwan because the risk it’s simply too high for China.

Trade tensions & restrictions: The trade tensions and the tech war has expanded to semiconductors, as the US government imposed hard export restrictions on US chip technology.

Tech & Internet Collapse. All Chinese giant tech companies suffer from strong regulatory climate and difficult economically context.

China Tech Bubble Explode

Entrepreneurship and freedom of action for the technology market helped giants like Alibaba, Tencent or Baidu become what they are today, but last year’s climate was changed because of the US sanctions & government intervention.

Conclusion: Is China a buy?

Investment in China is very risky but is coming with huge opportunities, and we prefer small allocation of assets to Hang Seng and preferably just take high convictions stock like DQ (Daqo Energy).

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How Close Are We to a Pivot Point on Fed Policy & Stock Markets?

How Close Are We to a Pivot Point on Fed Policy & Stock Markets?

We think today that Fed and Mr. Powell will search sooner rather than later for a pivot point policy to change things because we already have a higher restrictive economic environment. We should remember that, when Fed suggested last time in 2018 that “future course of policy was predetermined on autopilot”, the stocks collapsed and Fed backtracked. Now they are trying right to introduce “data depending” on their speech, just check what they have said on Sept 30:

“Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely. Fed will proceed in a data-dependent manner.”

Fed will keep hiking until something will break up. Just check the Bank of England (BOE) intervention because of illiquidity on gilt markets, also the Bank of Japan which have announced their first intervention to support Yen against a stronger Dollar. These interventions calmed down the market but nothing is done to solve the major fundamental issues.

Just check the chart below for Pound ADR (Average Daily Range) of 500 pips. This is not a common sense movement.

GBP-USD Gilt Markets

But when will we see an inflection point for Fed?!

It’s all about the last Jobs Report which shows that is much stronger than expected, with a 263,000 monthly job gain while the Unemployment Rate had a major drop to 3.5% versus a consensus forecast of 3.7%.

Average Hourly Earnings is at the lowest point since December 2021.  Stock market Futures are decreasing and bond yields are rising in the wake of a stronger than expected NFP. Inflation expectations have been on the retreat, but Mr. Powell still needs a lower job report next month to start change the monetary policy.

If we get a hot CPI tomorrow, while considering an improving job report in November, it could mean that we can’t expect a 125-bps worth of Fed hiking starting now, until the end of the year, but a 150-bps hike on December 2022. This scenario will be very bearish for S&P with another minimum of 300 points down from here.

If we will see a lower Job Report in November and December, therefore we could expect a stronger S&P from here.

Which Sectors Are Still Performing Better than S&P and What Are Our Exposure Today?

I don’t want to dig much further on this article.

We like the Energy Sector and we still have some good stocks like: CWEN, PIF, SU, VLO, TGA. Energy sector is the only branch on green this year. I think it’s too late to take new positions on energy right now, and if we see good news about the war in Ukraine, we will close some of our positions. Clean energy solutions will not solve this crisis, but it will be a part of the longer-term solution for improving the energy independence.

We have a great exposure on precious metals Silver & Gold, meaning 30% from our Portfolio. I’m still optimistic about Gold and I recommend to buy it after Fed will start changing its policy. Gold will be the first instrument that will start to grow. Gold registers a minus 8 percent year to date, but outperformed S&P with over 15 percent. We bought Gold between 1700 and 1800 and we expect a target price of 2000-2200 in the next year.

We are very bullish on Uranium, Lithium and Silicon because of EV market catalyst. We bought CYDVF (Cypress Development Corp), SQM (Sociedad Química y Minera de Chile S.A.), and bought again DQ (Daqo Energy).

The Financial sector it’s also one of our bets and will outperform S&P 500 because of the Rate Hike. Financial is in red year to date but emergent markets will outperform the US financial sector. We acquired Banco do Brasil (BDORY) because of a strong balance sheet and a good perspective on growth.

We have few opportunities to follow in a bear market and for us it’s an option to be exposed with 30% on cash until things will change from the FED side, maybe in the end of the first quarter next year it will be good time to acquire risk assets. What is your opinion regarding Stocks? Looking forward to hear your opinions in the comment section below.

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SELL EURCHF before rate announcement

Fundamental it's expected rate hike in Switzerland and persistent risk-Off sentiment it's a good framework to take a short position

Comercial Banks Positions

-> Credit Suisse discusses its expectations for next week's policy SNB September policy meeting. "For the upcoming SNB meeting on Sep 22, we see a risk that the central bank might surprise the market with a larger-than-expected interest rate hike. SNB President Jordan's speech at Jackson Hole struck a hawkish tone as he voiced concerns about long-term inflation upside risks," CS notes. "Therefore, we stick with our 0.9400 EURCHF target and would consider our view incorrect at levels above 1.0060,"

->Danske Research discusses its expectations for next week's SNB policy meeting. "EUR/CHF moved sharply lower yesterday afternoon, briefly dropping below 0.9550, reaching the lowest level since the removal of the floor in January 2015. We continue to expect the SNB to follow the ECB in terms of rate hikes to curb underlying inflation pressures," Danske notes. "We expect SNB to hike rates by 75bp on Thursday 22 September followed by a 50bp hike in December. Markets are currently pricing 58 and we acknowledge that it is a close call between 50bp and 75bp. In our base case, we expect EUR/CHF to move lower on announcement," Danske adds.

->Barclays comments "We expect the SNB to deliver a 100bp hike, more than the consensus forecast (50bp) and market pricing (75bp). President Jordan has been hawkish. His Jackson Hole speech outlined reasons for structural risks to a higher inflation . He made further hawkish comments after the ECB meeting. We remain short EURCHF (target 0.95) as the SNB out-hawks the ECB," Barclays adds. 3 minutes ago

Also technically we just have a breakout with growing bearish volumes SL 0.965 TP 0.933

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BUY FTNT 9-21-2022




  • Fortinet's GAAP profit margins are higher than peers .
  • Margins remain in line with the prior year.
  • Fortinet reported a good quarter that saw revenue grow 29% and operating margin around 25%.
  • Technically  we have growing volumes Good Support level 

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Risk On -> US CPI Peak yesterday but we don't think will go too far from this value

Risk On -> US CPI Peak yesterday but we don't think will go too far from this value

US July CPI +8.5% y/y vs +8.7% expected it's the first good sign about inflation's
But let's analyze data below:

  • CPI energy -4.6% vs +7.5% prior
  • Gasoline -7.7% vs +11.2% prior
  • New vehicles +0.6% vs +0.7% prior
  • Used vehicles -0.4% vs +1.6% m/m prior
  • Owners' equivalent rent +0.6% m/m vs +0.6% prior
  • Food +1.1% vs +1.0% prior
  • Real weekly earnings +0.5% vs -1.0% m/m prior

Stocks   are up with large gains SPX over 2.13% and Nasdaq NDQ over 3% Dollar down DXY over 2%. Instead of  this small bounce in market  Sentiment we don't think will last more than few days.

 

Goldman Sachs not expect inflation to drop too far from here!

Inflation will not go too much lower because:

  • The price of cars (main component of core CPI) will stay high for months because production problems and distribution chains problems
  • Retailer excess inventory will not have any impact on prices. GS estimates currently $20 bn—this translates to 3% of annual retail spending and 0.5% of total core goods spending. That only translate to 0.1% of downward pressure on inflation  
  • We do, however, continue to expect the strong dollar and easing supply-chain constraints to weigh on import prices later this year, and in turn on consumer goods prices by the first half of 2023
  • Consumers have made changes in their shopping behaviors, like switching to cheaper brands or pivoting to dollar stores to get their essentials.
  • Covid Cases are surging in China that will affect distribution Chains

 

On others investment front investors must seek exposure to green Energy and Electric Vehicles (EV) because the Senate's deal targets clean energy and electric vehicles. The Senate has passed the Inflation Reduction Act; amid its multifaceted, approximately $370b of energy-related spending, both the clean energy theme and the electric vehicle theme are key components of the bill and the primary focuses of this commentary.

 

Electric vehicles and the broader EV value chain could experience accelerated demand from tax credits, government EV purchases, loans and grants.
Symbols like TSLA NIO RIVN QS BLNK HYILN VLDR Plug HASI NEEE will benefits from this law

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How to Protect against Strong Inflationary Environment and Higher Interest Rates?

How to Protect against Strong Inflationary Environment and Higher Interest Rates?

After big rates hike by FED and ECB, investors are hoping that in the following year, central banks will start to normalize rates, therefore Stock market show a bounce back (SPX is near 4.000).

We think it’s a short-lived bounce but a good opportunity for a Risk-Off trade. We see volatility ahead, after rate hikes, because central banks (FED & ECB) are captive to higher inflation. But inflation is caused by production constraints, wars - and rate rises don’t fix these. If inflation was caused by higher demand, than a rate hike, normally, will have a better outcome.

Getting inflation down to the magical number of 2% would mean recession without any doubt and first half year is showing us that GDP is crushed with a 1.6% contraction. Monetary policy is working with delays and the economy is just feeling the effects of one of the most aggressive hiking cycles in history. Stocks rallied 2-4% each of the last four times, the FED hiked interest rates only to fall in the following weeks. Stocks are still expensive and financial results are disappointing, but investors are thinking that this is the bottom, but we cannot embrace this idea. We will face ugly consequences because interest rates were kept too low for too long time (over a decade), central bankers are responsible for the fact that right now we have a bubble on each economy branch.

Mr. Powel must act in same way as Volcker did few decades ago in 1979 and hike until inflation will land to normal values. His last speech was a hint to more rate hikes.

Do you believe that we will face a soft landing as Powell said few weeks ago?

We believe that we will face a soft landing in the same way that inflation was transitory” last year, according to Powell (just read our January 2022 article at: https://topfxinvest.com/blog/thoughts-about-the-2022-bear-market). Mr. Powell also opined that we aren’t in a recession, demonstrating again that the leader of the most powerful central bank in the world is the last person you would want to ask about the economy. Last week, economy suffered its second consecutive quarter of negative real growth and there is little reason to expect the third quarter will be any better.

Natixis Investments Managers see higher risks of a recession in the last survey. 64% said that recession is a distinct probability, and 24% said that recession it’s inevitable. Almost six in ten (58%) believe value will continue to outperform growth for at least a few more months, while nearly one-quarter (24%) think value will be on top for a few more years.

“The End of an Era

Strategists see a world that has changed dramatically in the past six months. After a decade in which the easy money provided by quantitative easing, low rates, and low inflation propelled markets to positive gains in seven out of ten years, the world is moving on. This next normal is marked with greater volatility and greater uncertainty. The big question for most investors may well be: How long will it last?”

Natixis Managers Survey

If you want to read more about the survey: https://www.im.natixis.com/us/markets/the-end-of-easy-money

Inflation is a brutal and merciless way of resolving structural debt & imbalances of corrupted governments. We see potentially multiple series of inflation & deflationary cycles within short time frames (six month & two years) that will cause huge volatility.

According to CNBC, inflation is a top problem in US.

CNBC Inflation is a top problem

Traditional investing style (60% stocks + 40% bonds) it’s not a solution today, because bond’s market is underperforming and stocks are crushed.

Wall street Journal investing style bonds and stocks

Market crush

How to protect your portfolio during these times?!

We can protect from the financial storm that is arriving by choosing the best stocks & ETFs from few market segments that will perform in difficult times:

Commodities: since prices already dropped off and would be a good hedge against risk-off tone. Symbols: CRN, DCUSAS, WY

Carbon Emission: KRBN, CARB, GRN, NETZ

Consumer Staples Funds: WCOS, XLP, VDC, FSTA, YI 111, INC, IBA, IMB

Real Estate REIT: STOR, O, NNN, SRC, UBA, ID.UN, APR.UN

Precious METALS: ZGLDUS, ZSILUS

Low debt & Cash flow Green Energy Stocks

 

You must avoid at any price Growth Stocks & Crypto Markets.

 

 

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No Place to Hide from the Financial Storm?!

No Place to Hide from the Financial Storm?!

We analyzed the last week's performance on each asset class and found that the most resilient category from year to date is Energy, REITs and precious metals (instead of the last rally down of Gold). It’s difficult to find a place to park the money 💵 in this economic and financial outlook. According to Warren Buffet, in a recession environment everyone loses, but some of the people have a small loss and others have high loss.

Even traditional safe heavens offered little protection in the first half of 2022:

  • Bonds have historically grown when stocks have plunged, but Treasuries and municipals Bonds sold off in the first six months with -7%, S&P500 Corporate Bond Index is down 15%
  • S&P500 is 19% down today, Nasdaq100 with 28% in red, Down Jones 14,5 % in red
  • Crypto Markets Bitcoin & Ethereum have lost over 70% from high
  • Commodities without energy-related doctor Copper have lost 23% and Cotton 17%
  • Precious metals are best performers today with only 3,8 % loss
  • Few REITs that have contracts related to interest rates also performed very well: VICI +8.5%, O -3.5%, UBA -0.8%
  • Dollar outperformed marked DXY with +12%

So how did we get here?

We get here because of the high Inflation, rising interest Rates, record Energy Prices, war in Ukraine, Covid 19 pandemic and FED easy money printing in this decade. Everything seems to be a bubble.

How long will it last?

Risk off mode will persist this year and also at the beginning of 2023. History of bear markets from '49 tells us that we can stay in the red between three months and 39 months.

How much will the markets drop from Here?

S&P has fallen from 30% to 60% in 13 bear markets. We are reasonable to accept a minimum of 10% draw down from here, but because of amplitudes of the factors that generate this financial cataclysm, we must see a much more loss in Equities. We must understand the psychology of markets and individuals to know how to act.

We think we are before of the Panic stage of the markets right now (see first image). What is your opinion on this current stage? Will appreciate your opinion on the TopfxInvest Facebook Page.
Many analysts that we consulted seem to indicate that a peak of inflation will determine a bottom for stocks. We don’t think that is a true scenario because of the magnitude of the factors that start this bear market. I would be extra cautious before making any big bets on stocks and I’m a big fan right now of high dividend stocks that are resilient to interest rates hikes.

How to act right now, do we have a place to invest?

We prefer to consolidate the Gold & Silver positions, also we started selling Energy & Commodities Stocks that outperformed the market (like Daco Energy DQ, CNQ). We think that Gold will rise after the FED will finish with rate hikes and the Dollar will lose some peace of growth. We also studied the history chart of EUR/USD and when the Dollar is on Parity with Euro, will have some correction on the Dollar Index.

Chuck Berry inspired this article with “No Particular Place to Go”

An interesting topic for a future article will be: How to identify fundamentals of a market bottom or how to store Gold in efficient & safe ways?

Thanks for reading, and I’m waiting your feedback for our articles on our Facebook Page.

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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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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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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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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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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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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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Optimism didn't last on Markets after China lower Rates

Optimism didn't last on Markets after China lower Rates

SPX gave back the gains at the end of the day, because investors lost conviction that an early rally had legs. Risk-On sentiment didn't last after China decreased rates. Fears of inflation and higher interest rates in accordance with Geo-Political conflict between Ukraine & Russia have sent markets in red at end of the session.

Concern that the Federal Reserve will aggressively move to raise rates this year is a much more powerful catalyst than Chinese bank intervention and stocks Earnings. Investors have been concerned about rising rates because they raise borrowing costs and could dent global growth prospects and douse the earnings outlook for companies.

Analysts at ING said geopolitical risks, notably the possibility of Russia invading Ukraine, could continue to add to pressure on rising rates concerns.

Gold & Silver touched new highs lifted by worries surrounding inflation and Russia-Ukraine tensions. Gold 1,842 & Silver 24.63 gains were unexpected in the short term when bonds are up and Interest rates are expected to grow but geopolitical context is also an important catalyst.

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Asian Indices go higher after China cuts it's rates

Asian Indices go higher after China cuts it's rates

China cuts Loan Prime Rates: 1 year to 3.7% (from 3.8%) & 5 year to 4.6% (from 4.65%)

The People's Bank of China cut its Medium-Term Lending Facility rate to 2.85%

  • from 2.95%
  • injected 700bn yuan with 500bn maturing
  • 1 year MLF
  • first cut since April of 2020

On the 7-day reverse repo today, rate cut to 2.1% from 2.2%

  • 100bn yuan injected today
  • 10bn yuan matured today

On Thursday this week, 20 January, we get 1 year and 5 year Loan Prime Rates set. 

A cut to the MLF will be seen as an indication the LPR rates too could see a cut.

Asian stock go higher after this Bank of China Move Nikkei +1% , Topix +0,89, Kospi +0,49, Hang Seng +2,38% 

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Disappointing Results push Stocks lower

Disappointing Results push Stocks lower

Yesterday markets were down with over 2% because disappointing Earning Results from banks like JPMorgan & Citi Bank. We are still waiting results of other big banks like Goldman Sachs, Bank of America. Morgan Stanley, to see if the lower trend will continue this week. The key driver to the current action in the stock market remains the spike in bond yields and announced Increased Rates. This Year stocks will be dealing with the highest inflation rate since the late 1970s, excessively high valuations, and an aggressive policy change by the Fed. 

2022 it's a year of challenge for stocks because we have to deal with:

  • Lower Profit margin 
  • To high valuations
  • Less liquidity in the economy 
  • Higher inflation 
  • Weaker economic growth
  • Weak consumer confidence due to inflation
  • Flattening yield curve
  • Lower earnings growth
  • Weaker economic data than 2021
  • Tighter monetary policy
  • Reduced consumption

 
Technically, Stocks broke below yesterday Trend Support Line with momentum and also Vix is UP. Tech Stock was affected badly losing over 3,3% 

SPX Down


SPX DOWN IN January 2022
Stocks still have room to move lower from here. We have recommended to buy Agricultural commodities in November and Soybean it's up with 6%.

Soybean Growth 


 

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Markets Expectations for 2022 regarding Stocks, Gold, Oil and Commodities

Markets Expectations for 2022 regarding Stocks, Gold, Oil and Commodities

As we started a new year 2022, we want to present you our conclusions on markets and an analysis of our managed portfolio. In this article, we will analyse four major assets: Stocks, Gold, Oil and Commodities.

After stellar gains registered in 2021, in 2022 markets are expected to grow at a moderate peace, due to the rising risks.

We are bullish on Gold and Silver, and we are also confident on a future increasing in agricultural commodities, as we also presented in our article: https://topfxinvest.com/blog/we-anticipate-the-food-crisis-in-2022 

Now let’s take a look on some factors that can influence stock markets in 2022:

Bullish Factors:

  • The domestic economy is growing
  • Consumer spending overall is strong
  • Employment is expanding, and the unemployment rate fell to 4.1% from 4.2%.
  • Corporate earnings are growing by 27% (Apple it's $3 trillion company & Tesla deliveries grow by 87%)
  • Covid-19 Pandemic new variant Omicron is decreases in death rates

Bearish Factors:

  • Rising interest rates: FED official announced this week that they see this year three, instead of two interest rates increase
  • Some stocks are extremely overvalued, like FTNT (over 100%: yesterday we closed our position on FTNT) or MRNA. Also, almost 100 stocks from S&P500 index are up over 50%, which is too much in our opinion. If US interest rate will hit 5%, stocks will go down badly, similar to the 1987 crisis.
  • Continuing inflationary pressures because of transportations issues. We already discussed this topic in our article Shipping Congestions and higher prices will continue until ends of 2022 according to Morgan Stanley
  • Global tensions between Russia and US on Ukraine / Kazakhstan, also China and US on Taiwan, which are possible to extend into some major conflicts.
  • Covid-19 Omicron it's still here, and we cannot anticipate the implications of other virus mutations. If we have other lockdowns because of new pandemic outbreaks, stocks will be badly hit.

Other opinions regarding stocks:

JPMorgan Kolanovic says to buy the dip:

“Higher bond yields should not be disruptive for equities, but rather support our call for a growth to value rotation. […] We stay positive on equities and expect Omicron will ultimately prove a positive for risk assets, as this milder but more transmissible variant speeds the transition from pandemic to endemic with a lower human toll. As this wave fades, it will likely mark the end of the pandemic Omicron’s lower severity and high transmissibility crowds out more severe variants and leads to broad natural immunity”.

On congested supply lines: “signs of supply constraints potentially passing their worst point”

BlackRock's largest fund asset has an optimistic view, but they raise concerns over China Covid19 policy: 

“The Fed has signalled three rate rises this year – more than we expected. Markets seem primed to equate higher rates as being negative for equities. We’ve seen this before and don’t agree. What really matters is that the Fed has kept signalling a low sum total of rate hikes, and that didn’t change last week. This historically muted response to inflation should keep real policy rates low, in our view, supporting equities.” 

“And not all spikes in long term yields are the same. Last week’s jump in U.S. Treasury yields was about the Fed signalling a readiness to start shrinking its balance sheet. This could result in a return of the term premium that investors typically demand for the risk of holding long-term bonds. This is not necessarily negative for risk assets as it can reflect an investor preference for equities over government bonds.”

Regarding China slows growth rate: “The key question is how China’s zero-COVID policy will stand up against Omicron. The policy so far has proven effective and enjoyed popular support, but has left China with almost no natural immunity. We expect the country to maintain the policy – at least optically – in this politically important year. This raises the spectre of more restrictions on activity, from targeted measures that keep the economy humming (Shanghai) to full-scale lockdowns (Xi’an). As a result, we believe downside risks to China’s growth have risen, even as Beijing appears bent on achieving its growth target this year by loosening policy.”

We think it's reasonable for Gold to push a higher price to 2500 after a huge stimulus amount, but it will happen only after the FED finishes raising the interest rates. Oil will slow down only after the inflation will also slow down, probably in the second part of the year according to Citi Bank Forecast 

We added to our portfolio some agricultural commodities and precious metals (Gold and Silver). and we sold some positions like: Tesla, Fortinet, Shopify, DocuSIgn, Disney, TradeDesk. In 2022 we plan to add more dividend stocks because we have a more neutral view on this year’s growth.

Further, I'm not a big fan of Crypto currencies. 40K for Bitcoin is a good price, but if it goes further under 30K, it's a good to buy and hold bet.

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Upstart Holdings UPST Stock of the Month August 2021

Upstart Holdings UPST Stock of the Month August 2021

Business Summary

Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform. The Company’s platform aggregates consumer demand for loans and connects it to its network of Upstart AI-enabled bank partners. The Company’s AI models are provided to bank partners within a consumer-facing cloud application that streamlines the end-to-end process of originating and servicing a loan. It has built a configurable, multi-tenant cloud application designed to integrate seamlessly into a bank’s existing technology systems. Its configurable platform allows each bank to define its own credit policy and determine the parameters of its lending program. The AI models use and analyze data from all of its bank partners. Consumers can discover Upstart-powered loans in one of two ways: either via Upstart.com or through a white-labeled product on its bank partners’ Websites.

Financial Summary

BRIEF: For the six months ended 30 June 2021, UpstartHoldings Inc revenues increased from $81.3M to $303.5M. Net income totaled $47.4M vs. loss of $4.7M. Revenues reflectan increase in demand for the Company's products and services due to favorable market conditions. Basic Earnings per Share excluding Extraordinary Items increased from-$0.07 to $0.62.

Why we think it’s a good bet
The company helps banking partners originate loans through its proprietary AI platform and takes a fee for their services. Today, more than 90% of its revenue comes from fees from banks or servicing with no credit exposure. Upstart claims it can secure loans and banks will have with 75% fewer defaults at the same approval rates. That is amazing number for banks and we thinks this company instead of expensive price will add over 25% per year growth in long term because their business model and few competitor UPST have a disruptive technology on AI field. Last months company acquired a new market segment auto-loans like auto lending (more than a billion dollars flowed through its auto software in the quarter).

They have a visionary founders. Upstart was founded by Dave Girouard, Anna Counselman, and Paul Gu in 2012. Girouard was the former President of Enterprise, while Counselam was a Senior Vice President for People and Product. Gu was a Thiel Fellow and had been featured in Forbes 30 Under 30.

The company was raised funds from First Round Capital, Kleiner Perkins Caufield & Byers, Google Ventures, and Mark Cuban. A series A round included former Google CEO Eric Schmidt, Salesforce CEO Marc Benioff, the Founders Fund, and the Collaborative Fund.

They have very Good ratings on platforms most of analysts offers very good rating perspective
UPST Ratings on Tip Ranks

Latest Ratings July & August
Also Fundamental Analyse Looks Good

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