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Monday 14th February 2022
Hi Friend,
TSE Monday Morning Markets ...
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| | The Saturday Economist Monday Morning Markets ...
This is our Monday Morning Markets Update for the 14th of February 2022. Equity markets steadied last week. Shanghai rallied as Wall Street slipped.
Central bankers are calling time. UK rates are on the rise. The Fed will move in March. Bond yields moved higher. US ten year yields closed at 2.00. UK rates closed at 1.50. Once the Fed stops buying, ten year rates will really rise. Soon the move, by Easter perhaps, to 2.50 in the U.S. and 2.00 in the UK.
Over over valuation index hit 6.3% in the week. A 10% adjustment in the US a possibility. 12% adjustment the requirement in tech. 5% the adjustment in Europe. Russian tanks on the border with Ukraine may push European prices into buy territory this week. Shanghai and Hang Seng offer value.It looks as if Facebook has been punished enough.
Top line, "Cash is Trash, (Jamie Dimon), Bonds are Garbage ( Bill Gross), Equities Are Overvalued (Everyman), Bitcoin is worthless (Jamie Dimon), Most NFTs are junk (John Hargrave)" ... When it comes to understanding market moves, "Any explanation is better than none" (Nietzsche). Be careful out there ...
"To understand the markets, you have to understand the economics".
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Markets up 0.4%. Overvaluation 6.3% ... Our global equity index basket closed level at 0.4% this week. The world looked on as U.S. stocks slipped lower. Nasdaq slipped 2%. The overvaluation model moved to 6.3%.
In Europe, the FTSE and Dax moved higher. The FTSE up 2%, the French index nudged ahead. Shanghai the best performer in the Asian block, still over sold on our world ranking.
Our overvaluation rating closed at 6.3%. A near 10% correction would be required to return US markets to fair value. 5% the correction required in Europe. China and Hong Kong, offer best value. No real concerns about a "Super Bubble" setback. Trade "Dynasties for Empires" remains the play. Concerns about Ukraine pushed European prices lower by some 3% as the trading week begins.
Easy money over the past year, now more difficult to find. Markets are adjusting to rising base rates and bond yields. Central bankers are raising discount rates. Slower growth in prospect, not a great cocktail for equity prices. Higher discount rates will be absorbed into prices, as long as earning forecasts hold. Great for contrarians.
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| | Bond Market Sentinel ... US Ten Year Yield 2.00 ...
US ten year bond yields closed up 10 basis points in the week at 2.00. Tapering set to terminate in March this year. We said last week, we expect bond yields to test the 2.00 level 'ere too long. So it proved. Pause for breath over the weekend, the key indicator trades at 1.93 this morning. 2.50 the forecast for Easter.
UK ten year gilts closed up 10 basis points to close at 1.49 last week. Trading at 1.50 this morning. The Bank of England is expected to raise rates by a further 25 basis points in March. Some super hawks expect a 50 point move. 1.60 the next level of resistance. We now expect ten year gilt rates to test 2.00 by Easter.
In Japan rates moved higher. In Europe, composite rates jumped 9 points. An end to negative rates. Bloomberg reports the stock of negative yield bonds, around the world, has fallen to $5 trillion dollars from $18 at peak at the end of 2020.
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| | Exchange Rates ... Sterling steady $1.36 ...
Sterling closed steady against the dollar at $1.36 and level against the Euro at €1.19. The Euro held moved higher against the Dollar at $1.14.
The Fed will move on rates in March, Some now expect a 50 basis point rise to end the party. The Greenback trades at $1.35 this morning. We said exactly the same thing last week.
We expect Sterling to average £1.35 through the year. Against the Euro we model €1.18 with a slight uplift in the Euro Dollar rate to $1.15. This on the assumption the ECB will yield to peer group pressure and begin to raise rates towards the end of the year.
["One of the nice things about being a currency forecaster, is that expectations of you are very low. Moderate success is a great surprise". Professor Avinash Persaud].
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| | Empires of the Cloud down -4.4% ...
Our Empires of the Cloud Fund was down 4.4% this week. Facebook once again under pressure down 7.4%. Google was punished slpping by -6%.
Apple, Microsoft and Amazon were down 3% on average. Our valuation index suggests an 12% over reach. Facebook with a PE of 15 and a forward price of $466 is looking like a buy.
A combined market cap of $8.9 trillion and an average PE of 29.3 still suggests a period of consolidation should follow at best. Further short term weakness probable, as markets adjust to higher rates in March.
Analysts remain bullish on our Empires of the Cloud Fund. The bulls anticipate a 10% to 30% gain for the fund over the next twelve months. Super bulls foresee a near 60% gain. Really? What's not to like? Amazon trades with a PE of 47 and a 22% over reach.
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| | Dynasties in the Cloud down -0.9% ...
In China we track, our "Dynasties of the Cloud" fund. We follow the fortunes of Alibaba, Baidu, Tencent, Weibo and Xiaomi. The fund was down by 0.9% in the week. Baidu and Alibaba offer best value.
Baidu the leader up 1.4%. Weibo the laggard down 4.7%. The downsides appear limited. Strong rallies a real possibility. The average PE is 20.9 compared to the Empires of the Fund average of 29.3.
We consider the fund to be oversold into 2022. Gains in the year ahead are expected to out perform with little downside. 14% the low level gain, 42% gain the average expectation. The high term upside is now 70% but you may have to wait a bit!
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| | Crypto Wallet up 5.8% ... Our Crypto Wallet was up 5.8% this week. Bitcoin pushed to $42,360 from $41,235. All bar Ethereum moved higher, with Dogecoin again the laggard up just 2.2%.
Bitcoin trades at $42,100 this morning. The Big Apes tested $45,000 on Thursday without much hold. $42,000 the support ledge, last chance to buy above £40k the bears suggest. Elon Musk reports Tesla still has £2 billion of Bitcoin on the balance sheet. Lots of reasons to lean on the ledge. The charts look ominous for Crypto.
Our crypto wallet, the "Traders Dream Pack", always promises to be an investors nightmare.
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| | Oil Brent Crude steady ... $93.24 ...
Oil
prices Brent Crude closed slightly lower at $93.24 last week. Trading at $94.43 this morning, European energy prices are rising as tensions mount over Ukraine. Our position is unchanged.
Talk of $100 dollar oil. The traders may seek to test the higher level. That looks like hard work. Fundamentals will rule to push prices lower. The US oil rig count is now at 516 up from 480 at end of year. Should be 900 at this price.
$80.00 may be the range over the first quarter. $75- $80 Brent Crude through 2022 is our benchmark call. Tad optimistic? Perhaps.
"Volatility remains in market demand, exacerbated by geopolitical supply side complications." Yep we really do say that! Prices above $90 won't help the inflation challenge but price pressures ease radically in the second half of the year either way.
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| | That's all for this week's Monday Morning Markets, have a great week ahead.
John
To understand the markets, you have to understand the economics
Friday Forward Guidance, The Saturday Economist, Monday Morning Markets. Forward to a Friend or Colleague. They can sign up for updates here.
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