US stocks are likely to drop further and are pricing for a stagflation
Yesterday was eventful. Besides the rumour of Ant Group seeking for IPO and subsequently denounced by the China regulators within an hour, US stocks kept moving lower in the last 2 hours of the trading session.
S&P 500 was down 2.4% while Nasdaq Composite declined 2.8%. From a technical analysis perspective, this is a bearish move as the index couldn't have strength to continue with its rebound in the last two weeks.
There's still a glimpse of hope as S&P 500 is still trading above 4,000 level but if that doesn't hold, the US stocks are in for another down leg and a new low could be made.
We will need very good news such as inflation has been tamed and the economy is growing well.
I think both are unlikely. In fact, the market seems to be pricing for a stagflation.
Firstly, everyone knows about the inflation problem for the last few months. Today is an important day as US inflation numbers are released. The selldown is likely due to an anticipation that the inflation will remain high.
European Central Bank has already raised the rates yesterday, for the first time in 11 years. So investors are bracing for bad numbers when the US release them.
I don't think the inflation numbers will go up by much but likely to maintain at high levels. I believe inflation has peaked.
Reason being some commodity prices have retreated. Mainly energy and selected grain prices remain high. Here's a 1y change snapshot:
Coal +205%
Natural Gas +178%
Wheat +80%
Crude Oil +71%
Palm Oil +65%
Corn +11%
Gold -2%
Copper -2%
Steel -6%
Inflation is here to stay but it shouldn't get much worse.
Secondly, freight rates have been falling and this can indicate an economic slowdown is happening. It can suggest that the demand is waning and trade activity is declining.
Freight can be linked to inflation too as it carries commodities and ships use fuel. This is another indication that inflation might have peaked.
As we saw from the commodity performances above, the metals are doing poorly. Metals are demanded by industries such as construction and manufacturing. Price decline can suggest a drop in demand and lower economic activity.
If the slowdown gets worse, we might get a recession. And if the recession gets worse, unemployment rates can go up. We will then end up in a stagflation since inflation didn't go away.
It will be a sucky situation when one loses the job and yet has to contend with high cost of living.
S&P 500 was down 2.4% while Nasdaq Composite declined 2.8%. From a technical analysis perspective, this is a bearish move as the index couldn't have strength to continue with its rebound in the last two weeks.
There's still a glimpse of hope as S&P 500 is still trading above 4,000 level but if that doesn't hold, the US stocks are in for another down leg and a new low could be made.
We will need very good news such as inflation has been tamed and the economy is growing well.
I think both are unlikely. In fact, the market seems to be pricing for a stagflation.
Firstly, everyone knows about the inflation problem for the last few months. Today is an important day as US inflation numbers are released. The selldown is likely due to an anticipation that the inflation will remain high.
European Central Bank has already raised the rates yesterday, for the first time in 11 years. So investors are bracing for bad numbers when the US release them.
I don't think the inflation numbers will go up by much but likely to maintain at high levels. I believe inflation has peaked.
Reason being some commodity prices have retreated. Mainly energy and selected grain prices remain high. Here's a 1y change snapshot:
Coal +205%
Natural Gas +178%
Wheat +80%
Crude Oil +71%
Palm Oil +65%
Corn +11%
Gold -2%
Copper -2%
Steel -6%
Inflation is here to stay but it shouldn't get much worse.
Secondly, freight rates have been falling and this can indicate an economic slowdown is happening. It can suggest that the demand is waning and trade activity is declining.
Freight can be linked to inflation too as it carries commodities and ships use fuel. This is another indication that inflation might have peaked.
As we saw from the commodity performances above, the metals are doing poorly. Metals are demanded by industries such as construction and manufacturing. Price decline can suggest a drop in demand and lower economic activity.
If the slowdown gets worse, we might get a recession. And if the recession gets worse, unemployment rates can go up. We will then end up in a stagflation since inflation didn't go away.
It will be a sucky situation when one loses the job and yet has to contend with high cost of living.
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