Flight To Shite
Robin Wigglesworth of the Financial Times coined that phrase and it fits the market action from yesterday. It is the opposite of a flight to quality.
The Nasdaq rallied 3.3% yesterday, double the rise of the S&P 500. Basically, the market bought "long duration" stocks much more than regular stocks. Long duration stocks are stocks whose profits a long way in the future. They tend to not have earnings now but will be glorious in the future. Basically, everything that got hammered in 2022 rallied yesterday.
The market is saying that the Fed has almost finished their tightening cycle. Perhaps a couple of more .25% rate hikes and they will be done for this cycle. And then the Fed Heads will start to cut interest rates by the end of the 2Q2023.
What is the market smoking? Did the market actually listen to Generous Jay Powell? Reality check time!
He basically said that they may have to keep raising rates longer than the market thinks. So maybe he is saying that the peak will be 5.75 not 5.25.
As I explained earlier this week, I think the Fed will go higher and longer than the market expects thus setting markets up for a significant counter trend move later this year on disappointment about Fed policy.
I'm writing this before the non-farm payrolls figure is released today but the expectation is for a slowing of employment growth. That will books the various markets as it will lead to further ideas that the Fed will stop tightening soon and start easing soon.
For now, you may expect the stock market and gold to continue higher, bonds to stagnate, and the dollar to continue lower.
I think that one of the biggest trends this year will be the bear market in the dollar. ECB chairwoman Christine LaGarde has become the world's leading anti-inflation hawk so will keep raising rates more aggressively than the Fed and will raise them longer than the Fed. So this will shift interest rate differentials sharply in favor of the euro.
At the same time, inflation differentials are also running in favor of the euro versus the dollar.
The big imponderable is the war in Ukraine. An increase in the heat of the war would be big negative for the euro. My strategy is to stay long EURUSD but keep a tight stop.
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