Has inflation peaked – and will shares rally?

Has inflation peaked – and will shares rally?

Sometimes, making trading profits is a breeze when forecasts are panning out and good trends established and targets met. You tend to feel you are a genius! And there are other times when promising trends are suddenly reversed and your best-laid plans go phut! In these times, not losing (much) money is a real achievement!

I would say that for most of us, we are in this latter period. It seems we have really dropped down the rabbit hole into a bizarre world where the old certainties in finance can no longer be relied on. Even for the money manager pros as below:

Conventional investing this year is certainly a very tough game. Most large portfolios try to be be ‘balanced’ with a mixture of equities and bonds. But with the record-setting surge in US bond yields earlier together with another record-setting plunge in US equities, there has been nowhere to hide. This extract from a recent Bloomberg piece sums it up pretty well:

“The overriding factor driving markets was inflation, with the attendant upward pressure on interest rates. And that had a negative effect on almost everything. As in 2008, when investors thought they had diversified by holding commodities and emerging markets, it turns out that buyers of stocks and bonds were just making the same bets in different places. This is how Duncan MacInnes of Ruffer put it:

The best case scenario for stock and bond investors was a -4.5% return from high yield bonds. Everything else was worse. Equities, sovereign bonds, corporate bonds, infrastructure, property, private equity, private credit, venture capital and cryptocurrencies all posted negative returns. There was nowhere to hide – and that is before adjusting for the 7% inflation ravaging your capital.

We have called this the illusion of diversification. The balanced portfolio was not balanced. The assets investors believed to be diversifiers turned out to have higher cross-asset correlations than first thought. They all appear vulnerable to the same risks – rising interest rates and rising risk premiums, which both appear to be happening at the same time. The only place to hide in conventional assets was commodities.” 

The last sentence tells the story that commodities were the only sector that gave a positive return – as I forecast last year and outlined in my May 17 blog This is the Age of the Commodity, not Shares. . In fact, some of the gains have been spectacular from energies to the tropicals to the ags.

But will this situation prevail as we head for the summer months? Already, the ags are faltering perhaps as a result of traders looking at the mountains of last season’s grain still held in Ukrainian silos that are not being exported to needy regions. But with enormous pressure to start releasing some of this grain by the occupying Russians to pay for their war, traders are betting this will happen soon.

After all, their oil revenues are in decline by virtue of the EU sanctions and they need to replace them. The only large potential source of revenue for them is their grain stockpile. Also, the new crop will be harvested soon and they will need the room for that.

One scenario I can foresee is that we will hear of such a release of stockpiles in Ukraine (to India and North/East Africa, mainly?) which would coincide with a major low in Wheat either later this month or in July and lead to a rip-roaring rally as vagaries of the weather would start to impact the prospect for the Northern Hemisphere crops.

But there is little doubt that the grain markets have become much more difficult to trade compared with the strong bull markets of Feb-Mar. Back then, position trading was correct but now trends are quickly snubbed out. Here is my possible roadmap for Wheat:

There are several negatives for this market at present from the looming Russian sales to the bumper Aussie crop. Not only that, but the MSM has become fixated in the ‘surging food price inflation’ story that dominates the headlines. As you know, when a dramatic story such as this dominates the headlines, it is time to start looking the other way. The MSM are always late to the party – just when it is about to wind down.

I have seen MSM opinion pieces where a loaf of bread will double in price soon. But even in today’s market price, the cost of the wheat/flour in a 1-lb loaf of bread is only about 10p and many loaves retail around the £1 – £2 mark. The Wheat price can double from here without having a major impact on the final bread price.

Of course, in less developed nations flour is bought and households make their own bread. Thus the Wheat price has a much more profound effect on budgets there.

As part of the MSM ‘food price inflation’ story, I see in today’s headlines a pint of beer has reached the giddy heights of £8 in London. I expect to see someone predicting £10 or higher.

We may have reached Peak Food Inflation stories – but not Peak Energy stories I fear.

But of course, with the ‘unconventional’ Putin directing traffic in grains, anything is possible that destroys a logical analysis.



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Is China Tech (and US Tech) about to make a come-back?

Yesterday’s much-watched non-farms jobs report was a damp squib with NYSE share trading volume the lowest of the year. But what is happening in the much-hated China market? I like to follow the Hong Kong Tech Index as it a very liquid and easily tradable market and is a proxy for the mainland tech sector.

This index has been clobbered in recent months as the Chinese authorities have been clamping down on the formerly over-exuberant tech sector on the mainland. In fact, in the four months since the ATH was reached, the index has lost a whopping 70%.

But do I see signs of life emerging?

The decline off the Feb high appears to be a complete five down that should lead to a three up. And a good break of the wave 2 – 4 highs trendline extension would likely set up a massive short squeeze.

Sentiment remains highly negative, as it does in the US markets. Most of the MSM coverage is bearish with some expecting an armageddon scenario. Here are a few:

The market’s summer from hell begins

Musk cuts Tesla jobs and has ‘super bad’ feelings on the economy

Soros’s money manager warns recession is inevitable

Is ‘normalcy bias’ blinding us to the coming economic storm?

Well you get the drift. But after five months of sharply declining share prices, most have finally become convinced the market is heading lower. Needless to say, very few have that conviction at market highs.

We recently suggested that some of the FAANG Gang had reached points where decent rallies were likely. Here is one of my top picks – Amazon. It was trading at a massive 45% discount off its July 2021 ATH at the recent $203 low on 24 May (it has just been split 10 for 1)

It was ripe for a very decent bounce and is progressing in that vein. So with many expecting a recession and darker economic times ahead (see headlines above), will Mr Market do what it does best – by punishing the maximum number of participants?

Many are calling the push up in the S&P from the February low as a ‘dead cat bounce’. And I am quite sure, many are poised to short this bounce if not done so already. I have refrained from doing that so far as I see many reasons to be cautious (see above). In recent days, I have been expecting to see at least one more push up.

The vast majority are taking the Fed at its uber-hawkish word with repeated 50bps rate increases as far as the eye can see until inflation is ‘tamed’. But if the signs from the commodity markets (ex-energy) are believed, the official inflation data should start to retreat and provide an excuse for the Fed to ease off on the hawkish tone.

And then the algo traders would go wild to cover shorts in a great fireworks display.

Crude oil prices still heading for my targets

Despite the agreement last week of OPEC+ to ramp up production, prices are still climbing. Here is my roadmap from last month

The ATH was made in 2008 at the $150 mark and I see no reason to move away from that target. Of course, it may move higher. here is the daily chart

It has just move up out of my trading channel and heading for the wave 3 high at $128.

If this roadmap is correct, it will pose a great challenge for the real economy, of course. Surging energy prices are a great strain on economies much as occurred in the 1970s when stagflation reared its ugly head. And in theory, recessions are likely with sagging share prices.

Thus, the Fed has an almighty question to solve – keep raising rates to put a lid on price inflation and depress share values. Or ease up on the stated rate increases and let inflation take care of itself and support share values.

With market sentiment so overwhelmingly bearish, maybe it is the latter scenario that will play out near term at least.

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