Week Ahead: Profits Focus on Inflation, Rate Hikes Put Pressure on Stocks and T-Bills

0
  • Stocks and bonds sell in tandem … this is very unusual
  • Big banks kick off fourth quarter earnings season

The first week of trading in 2022 proved to be volatile, with turbulence set to continue into the week ahead.

Although last week started off with a new high for the, it was mostly a drop from there for all major US indexes. By the close of trade on Friday, all four benchmarks had been sold. Adding to the volatile nature of the stock markets last week, and possibly next, the (VIX) rose, for the first time in three weeks.

The two biggest losers of the week were the, -4.5% and the, -2.94%; Perhaps equally telling, the mega cap, which lists mostly blue-chip value stocks, was down, albeit just 0.3% over the same time frame.

T-bills were also sold, pushing yields to their highest levels since January 2020, when the coronavirus outbreak appeared to be a regional health problem confined to China.

The FOMC’s mid-week post, which said the Fed had become more hawkish than markets might have anticipated, and Friday’s disappointment, which turned out to be well below expectations, helped the darkening of the risk outlook as the week progressed.

Unusual market pairings, multiple risks accelerating

Usually, government bonds tend to have a negative correlation with stocks, but over the past week stocks and Treasuries have moved lower in unison, which is rare. Usually, investors sell debt in order to free up money to buy stocks. As such, stocks typically rise with returns, as traders alternate between preserving capital and growing.

However, with the current outlook for interest rate hikes via the Federal Reserve’s upcoming rate hikes, which many believe could begin as early as March, a different dynamic is at play. current Treasury yields too low. That is why, on a relative basis, last week short-term bonds outperformed.

Typically, a surge in yields, like that which has occurred for the banknote and other treasury bills, after the greatest fundamental threat to the economy in at least a generation, the COVID pandemic, would be considered as a distinctly positive signal for equities. However, since the bond sell-off was not risk-based, we do not consider this a reliable bullish indicator.

After registering above the March 29 high, yields have officially established an uptrend. However, rates encountered resistance at these levels and stabilized below the previous peak. If yields were to fall below the July 19 low of 1.128%, they would complete a double high.

Investors will be sure to watch Federal Reserve Chairman Jerome Powell in his Senate nomination hearing on Tuesday, and Wednesday’s will likely cause market ripples as well.

As investors struggle to stay their course in the face of escalating inflation and Fed tightening, the fourth quarter earnings season officially begins this week, with JPMorgan Chase (NYSE :), Wells Fargo ( NYSE 🙂 and Citigroup (NYSE 🙂 all reporting on Friday, making it an even more complex time for market players grappling with several major fundamental themes simultaneously.

Along with stocks and government bonds working in tandem, another unusual pairing also occurred. High-growth, mega-cap tech stocks, darlings of a locked-down economy, and domestic small-cap stocks, which typically outperform signs of an economy reopening, both came under pressure in the past week.

This is due to the double stress: rising interest rates make skyrocketing valuations of mega-tech stocks even more expensive, while domestic small caps that don’t have a strong online presence are the most susceptible to downside. Rising rates of COVID, which continues to spread, as global cases exceed 3 million, increasing the risk of further pandemic restrictions.

By removing companies requiring an open economy from the list of battered stocks, the remaining value stocks were the clear winners, as indicated by the “outperformance” of the Dow Jones at the end of the week.

Among the sectors of the S&P 500, led with a gain of 10.52%, followed by a rally of + 5.43%. rose 0.64% with the only other sector in the green, trailing 0.4%. As noted above, underperformed, falling 4.57%, just behind 4.9%.

Daily NDX

It has shown signs of leveling off, falling below the uptrend line from the March 2020 low after moving sideways from its November high.

The Russell closed less than half a percent of its lowest since February 1.

For now, savvy investors will continue to watch treasury bills which have provided a leading indicator for stocks.

Regarding all of this, it looks like a pattern that we thought was bullish is breaking down.

Daily Dollar

Oddly enough, it looks like the greenback is about to drop in the face of a rate hike. We hope the price will find support through its uptrend line.

also tries to find its place.

Daily Gold

The precious metal has been trading in a range since August 2020.

completed an H&S top, with a 6% penetration of the neckline.

BTC / USD Weekly

Usually, this would be a good filter for even the most conservative investor. However, cryptos are unpredictable. Nonetheless, we are betting that Bitcoin will extend its decline, with the next test hitting the $ 30,000 level.

is heading higher, having gained 5% over the past week. The additional crude gains will be fueled by unrest in Kazakhstan’s main oil-rich city, Almaty. In addition, Libyan production has been reduced to 729,000 barrels per day from the peak of 1.3 million per day, in part due to pipeline maintenance.

Weekly oil

WTI rose for the third week in a row, possibly avoiding an H&S high, but energy commodities are still at risk of trading in a bearish corner.

The coming week

All times shown are EST

Monday

7:30 p.m .: Australia – : is expected to have declined in November to 4% from 4.9%.

Tuesday

5:20 p.m .: Euro zone –

10:00 am: United States – Fed Chairman Powell testifies

12:00 p.m .: United States –

Wednesday

8:30 am: United States – : seems to remain stable at 0.5% MoM.

10:30 am: United States – : last week’s print showed a decrease of -2.144 million.

Thusday

8:30 am: United States – : should drop slightly to 205K from 207K.

8:30 am: United States – : probably dropped from 0.8% to 0.4%.

Friday

2:00: United Kingdom – : previously printed at 0.1% MoM.

2:00: United Kingdom – : forecasts are expected to reach 0.2% in November, down from 0.0% in October.

8:30 am: United States – : should slide from 0.3% to 0.2%.

8:30 am: United States – : at -0.1% after 0.3%.

Share.

About Author

Comments are closed.