Privatus Morning Briefing (Monday, December 19th, 2022): The Morning After

Good morning all,

After an absolutely epic World Cup football final, this Monday seems like even more of a letdown than usual. It is the midst of holiday season, but nevertheless, reality bites. The risk of higher interest rates pushing the US into recession in 2023 is casting a pall over trading as we wind down into year end.

Asian stocks have followed Wall Street lower this morning as the Federal Reserve’s resolve to keep raising rates and a wave of Covid in Beijing damped sentiment for riskier assets. Shares are down in Japan, South Korea and Australia. Equity futures pointed to a slight decline in Hong Kong and US futures contracts are marginally higher.

The S&P 500 and the tech-heavy Nasdaq 100 closed lower for a third day on Friday. The quarterly "triple witching" expiration of equity derivatives amplified market moves. The dollar weakened slightly against most major currencies. The Japanese Yen was supported by a report that the Japanese prime minister may consider allowing more flexibility in the monetary regime, which has kept the nation’s interest rates at rock-bottom levels.

A surge of Covid infections in China continued to weigh on sentiment, but investors may get relief after China’s top leaders said they will focus on boosting the economy next year, hinting at business-friendly policies, further support for the property market while likely scaling back fiscal stimulus.

More details, and market closes, below:

What Happened Overnight?

• Lionel Messi finally?has his most coveted trophy.?Argentina beat France?on penalty kicks to win the World Cup, sparking mass celebrations in Qatar's Lusail Stadium. Messi scored twice while Kylian Mbappé had a hat trick for the defeated French in a 3-3 draw that was settled with a dramatic shootout
• A report that?Japan PM Fumio Kishida may alter BOJ policy?over its 2% price target is the main market focus in Asia this morning.?Japan plans to revise?a ten-year-old accord with the BOJ and will consider adding flexibility to the agreement's 2% price goal, Kyodo News reported. Kishida will discuss the matter with the next central bank governor, who'll take office in April. The yen is up.?The Aussie also advanced
• US equities suffered a second straight weekly loss. The S&P 500 fell more than 1% Friday, as the quarterly triple witching expiration of equity derivatives exacerbated volatility. Treasuries were mixed, with short-term bonds rallying. Oil dropped and gold advanced

'Tis the season for predictions:

• According to JPMorgan and StoneX, the world's biggest?money managers?are set to unload up to $100 billion of equities?in 2022's final weeks as they rebalance portfolios to achieve a 60%-40% stock-bond mix
• That's expected to add to the recent selloff, with?bonds the likely beneficiaries. And with intraday spikes in yields dissipating quickly last week in a sign that buyers are pouncing on them, it appears?bond managers are sensing opportunities?after the worst year in a decade
• And?2023 looks like a mixed stocks bag., and various market participants predict the?S&P 500 may go nowhere, trapped between 3,500 to 4,400 in the next 18-36 months
• Global market swings?will continue, with advice focusing on?defensive and value stocks?in the new year

Crypto:

• Sam Bankman-Fried plans to drop?his fight against extradition to the US to face a range of criminal charges, people familiar said. The FTX co-founder has been locked up in the Bahamas since last Monday when he was arrested at the request of American authorities.
• Meantime,?uneasiness is growing around the dominance?that his rival Changpeng Zhao's?Binance holds?in the cryptocurrency market, especially after accounting firm Mazars Group halted work for Binance and other crypto firms on Friday. Bitcoin was broadly steady over the weekend, though under $17,000
• Chart of the Day:?IPOs are heading for their?longest drought since the global financial crisis?— and bankers don't expect a revival anytime soon. Just $207 billion has been raised this year — 68% down versus last year — as flotations elsewhere failed to make up for a frozen US market. "Two things are needed for ECM activity to resume: stability around inflation and visibility on the trajectory for interest rate hikes," said Goldman's Edward Byun. He expects clarity on both in the second quarter of 2023

What's Coming Up This Week?

• In the US,?the House committee investigating the Jan. 6, 2021, insurrection?at the nation’s Capitol is wrapping up before Republicans take control of the chamber in January. The panel will hold a public vote Monday on?whether to approve a final report, and?whether to refer any of its findings?to the Justice Department?for potential criminal prosecution, with former President Donald Trump a possible target. The report and any referrals are scheduled for Wednesday (Monday, Wednesday)
• European energy:?The?EU is considering cutting its proposed natural gas price cap?by almost a third. Ministers meeting on Monday are due to discuss a revised ceiling of €188 per megawatt-hour in a bid to break a deadlock and cushion the impact of the energy crunch. Soaring prices have already cost Europe €1 trillion and, with gas markets expected to stay tight until 2026, the crisis may only just be getting started (Monday)
• China’s leaders?are due to wrap up their?annual economic planning conference
• Earnings?for the week include Cintas,?FedEx, General Mills,?Micron Technology, Nike?and Paychex

Any Further Thoughts, Vinod?

• The?predictions for 2023?caught my eye. So, it's not just us, but much larger and more established players saying the same thing that we have been for the past couple of months!

?Specifically:

• Ongoing persistent volatility?- ergo, a?great environment for Macro strategies
• DM Equities rangebound?with the SPX likely to remain between 3500-4400 in 2023 (I must say 4400 seems optimistic to me)
• However,?a clear divergence at the sectoral level?-?value and defensive sectors?likely to comfortably outperform, and hopefully deliver positive alpha

Meanwhile,?a bottom probably is in for Bonds

• Even as the Federal Reserve has made clear it intends to raise rates further to ensure continued progress on inflation, and that it’s not contemplating the eventual rate cuts traders are pricing in, investors are already being rewarded for seeing value in the Treasury market. With this week’s increase to 4.25%-4.5%,?the central bank’s range for the federal funds rate exceeds the highest-yielding Treasury securities?— a warning to investors against waiting any longer to buy
• On several occasions this week,?intraday spikes in yield dissipated quickly, a sign that buyers are pouncing on them.
• The first occurred after the Fed decision Wednesday, spurred by policy makers’ upwardly revised median forecasts for the eventual peak in the policy rate and for inflation
• Over the next two days, a deep selloff in euro-zone government bonds sparked by hawkish European Central Bank commentary caused only temporary cheapening in US rates
• A?steep drop in Treasury volatility?this week after the Fed decision boosted investor?confidence that yields won’t attain new highs
• The interest in buying bonds?reflects the view that inflation probably has peaked and will fall sharply, even if the Fed isn’t ready to draw that conclusion
• Also, that the four-percentage point increase in the policy rate since March is?sowing the seeds of a recession?that will lead eventually to rate cuts, if not in 2023 then in 2024

?In short:

• Increase Fixed Income allocations?- but focus on?high quality, investment grade
• Rotate into value and defensive stocks?away from growth names
• Allocate to macro strategies?to gain?diversification?and take advantage of?entrenched two-way volatility?in traditional asset classes

?

This will likely be the last report from me for 2022 - even more reason for my long-suffering readership to celebrate! Have a relaxed, happy holiday season with your families, and all the very best for 2023.