Of money
What cracked in Nasdaq?
The living spirit of the markets is gone
One word from Fed Chairman Jerome Powell in Congress put pressure on banks and markets began to rage. We seem to be entering a challenging period. Interpretation
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Wall Street
Guy Beit Or, guest column
Sunday, 05 December 2021, 11:15 Updated: 12:06
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The last line of the year stock markets have entered high multiplier levels and with an suboptimal environment, with inflationary risks rising and central banks already in the process of retreating from the ultra-expansionary monetary policy they have pursued since the crisis, both when supply chains crisis On the horizon of economic activity in the coming months.
And yet, until recently the markets have dealt with this reality successfully while continuing the uptrend trend and breaking new records.
Still, something in the last two weeks has cracked, two weeks in which we have witnessed a great many surprises that have brought renewed uncertainty to the markets and the "living spirit" seems to have disappeared.
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To the full article
A nervous and unstable market.
Wall Street last week (Photo: GettyImages, Spencer Platt)
The trigger was the appearance of "Omicron", which initially led the markets to estimate that the Fed would choose to act in the old and familiar way - "turn back", and back to providing more liquidity until the rage passed. But what actually happened? Despite the growing cloud around the horizon of economic activity, Fed Chairman Jerome Powell came to Congress and gave a particularly "hawkish" appearance, saying it was a good time to retire the word "transitory" when it comes to inflation. many - inflation really is not transitory and it seems that central banks are starting to be stressed that much.
I mean, Powell knows and sees risks in global economic activity due to the government's response omicron, weighed those risks against the risks of inflation and came out an unequivocal message to the world and is the Fed is expected to accelerate the completion of program The quantitative easing, which also means that raising interest rates is just around the corner.
Of course to surprise the markets were particularly volatile last week, which led us to the weekend where we got another surprise in the form of an employment report that managed to confuse many investors. Why? Recorded in 2021, which easily gives the report the title "weak".
However, we see that the main message from the November employment report is not in the top line but in the details, and the conclusion is that the American labor market is very tight - the participation rate has risen, the unemployment rate has fallen sharply and wages continue to rise rapidly.
In our view, the details of the report are only likely to reinforce the Fed's concerns about "non-transitory" inflation.
What drives the stock market?
When we analyze the stock market from a 30,000-foot perspective, we look at two key vectors. The first vector is the underlying data like the corporate profits that are also reflected through the macro data, and the second vector is the liquidity determined by the central banks through the monetary policy.
Regarding the first vector, there is no doubt that the level of economic activity is still strong, but we have been seeing the slowdown around the corner for some time, whether in the weakness of private consumption or the industry affected by the continuous supply chain disruption and energy crisis. These trends in the coming months.
This brings us to the liquidity vector - according to the book's rules in the past, at such a time central banks tend to give more liquidity but this time central banks do not have these luxuries as inflation is high and as Powell said, can no longer be said to be transitory.
In light of this, we should not really be surprised by a weakness in the stock markets, which we believe is expected to accompany us in the coming weeks.
Created a lot of nerves.
Powell (Photo: GettyImages, Kevin Dietsch)
And it is impossible without a word about the crypto market and what happened to it over the weekend when on Saturday (they are traded 24/7).
Central currencies have already fallen more than 20%, but declines have moderated and Bitcoin, for example, has ended with a decline of "only" 12.7%.
It is no secret that quite a bit of crypto market trading is done with investor leverage (Margin account), which makes it a much more volatile market and particularly sensitive to high volatility in stock markets.
The rise in inflation and its significance for liquidity in the markets seems to have hit this market over the weekend, with declines apparently intensifying through positions forced to quarantine in the derivatives market.
In the end, the drama in the crypto markets over the weekend is another expression of the risk-off atmosphere that has taken over the markets and it will now be interesting to see how the markets react in the opening of the week to the little drama in the crypto markets.
How is the bond market expected to respond during this challenging period?
Guy Beit Or (Photo: Yachz)
As we keep saying, what drives the short market bonds is not really what drives the long parts and in the current and unique economic environment, it has many meanings. The short parts of the yield curve are mainly affected by interest rates and inflation, but as they move up curve, weight decreases and the weight of economic activity and the state of the stock markets is increasing. On normal days, we expect to see a positive correlation between the rate of inflation and economic activity, but we are in times of a slowdown in economic activity and accelerating inflation.
we believe that the uncertainty regarding the economic environment will be high in the short term It will be dominated by the Omicron Trade, until it is clear how effective the vaccines and treatments are and how aggressive the governments will be in such a restrictive environment.
On the other hand, high inflation and more are likely to provide us with surprises in the future, despite the drop in oil prices, just listen to what Powell has to say.
In our estimation, the more volatile policy will have a negative impact on the short-term nominal channel abroad, as well as in Israel. Stay for a longer period of time than is estimated what is expected to improve with the short close channel so we recommend buying it in weakness.The
writer is the chief economist of Psagot.
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