The context at the beginning of the year is favourable for the markets, both equities and bonds, as it incorporates quite a favourable mix: continued disinflation, the prospect of an upcoming pause by the Fed and the expectation of a vigorous recovery in China following the end of the zero Covid strategy.
The link between global warming and greenhouse gas (GHG) emissions is not in dispute and the world’s public opinion has become aware of it. CO2 accounts for three quarters of GHG emissions, although the share of methane has been increasing in recent years.
Putin and Powell were certainly the 2 most important figures of 2022 and in a negative sense for the economy and the markets. Of course, we are not confusing the two figures. One is a war criminal and the other a central banker mired in probably the most complex situation in US economic and monetary history.
The “crisis” we are experiencing is an energy crisis (which primarily concerns gas and coal) and, more generally, a commodities crisis, not just an oil crisis (see graph below), with a certain tendency to stabilise in recent weeks.
The bond correction that followed the deflationary shock of the 1st wave of COVID started in the summer of 2020 and has continued almost steadily until now. The yield on the 10-year T-Note has thus risen from just over 0.50% in August 2020 to over 3.00% recently (with a sharp acceleration between early March and late April).
War is, regrettably, part and parcel of the history of mankind. As Carl von Clausewitz famously said, “war is simply the continuation of political intercourse with the addition of other means”.
The world that resulted from the reunification of Germany and the disappearance of USSR (1989/91), in other words the world of peace dividends, is well and truly over.
The impact of the war in Ukraine on the markets will depend on the duration and extent of the conflict, but also on the possible extension of sanctions. Indeed, History shows that if local conflicts have a limited effect on stock markets, this is no longer the case when they impact energy and commodity prices.
In our view, the January sell off was “just” a correction and not the beginning of a bear market. So, even if we should not be under the illusion that the market will return to its peak level rapidly, this drop could be considered as a good entry point.
Are we currently seeing formation of a bubble, or even a bubble peak, following the past four month’s rally? Indeed, over the period, despite the slew of bad news, the S&P 500 experienced just two slight consolidations. Could the sell-off of the past few days not be the first signs of a deeper downtrend on a 6-month horizon?
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