Rotation - After gyrations

24 de jun. de 2022

INVESTMENT CONTEXT

• S&P 500 Energy Sector has registered 10-trading day decline dropping by 23.7% as fears of recession and lower demand pushed traders to liquidate longer-dated positions
  
• On June 23, all 33 of the U.S. biggest banks, some of which considered as systemically important, successfully passed the Fed's annual stress tests, confirming their ability to lend and maintain capital levels during severe economic breakdown
  
• During the summit in Brussel on June 23, Ukraine and Moldova formally received the symbolic status of "candidates" to join the European Union
  
• JPMorgan does not expect a recession to materialize over the next 12 month; according to the Bank, global growth will accelerate from 1.3% in the first half of 2022 to 3.1% in the second part of the year thanks to recovery of Chinese economy
  
• On a different note, Germany warned that Russia's move to curb natural gas deliveries to Europe could trigger an economic downfall similar to that caused by Lehman Brothers at the onset of the Great Financial Crisis
  
• Copper prices recorded 16-month low on June 23 because of growing worries about rising COVID-19 cases in China and stoking worries of a global economy recession
  

PROFZERO'S TAKE

• As the world finally takes notice that there won't be a solution to the current industrial crisis unless a global strategy on energy emerges, ProfZero has witnessed the steep correction faced already by commodities just on fears of a recession. Brent crude has plunged to USD 110/boe after some bull analysts forecasted it could top its all time high at USD 147.50/boe (July 2008); iron and copper are down 30% and 17%, respectively, on a monthly basis, while also wheat prices retraced 25% from the all-time high touched on May 17. Albeit encouraging under an inflation perspective, these signs may be indicative of greater distress in commodities - hence more stringent need to quickly restructure global supply chains, particularly as soft commodities are exposed to extreme conditions (Italy drought)
  
• Growth stocks roared back on June 24, as traders unloaded Value and commodity-driven stocks repositioning in favor of the battered tech segments. ProfZero argues the move comes as investors reassess the likelihood of a recession, which would undoubtedly punish cyclical players, starting from big-ticket items (automotive, leisure operators) down to non-core consumer goods (non-food retail, handheld devices). As Growth trades still at record lows, it might be a good chance to start fishing for opportunities before the next cycle kicks-in - yet bearing in mind that within the next 2 weeks markets will still likely face volatility spikes due to June inflation reading in the U.S. (ProfZero does not expect a major slowdown yet from May's 8.6%) and Q2 earning season
  
• After Citi and Deutsche Bank located the probability of a recession in the U.S. at 50%, JP Morgan historical bull Marko Kolanovic reiterated his positive stance for a soft landing in the second half of the year, thanks to solid Chinese recovery and stabilizing geo-political conditions, including the conflict in Ukraine . As much as in May, ProfZero fails to share Mr. Kolanovic constructive tone. Although fully persuaded the war in Ukraine shall end, any tangible sign of relief for the world economy will take months to materialize. In China, President Xi has confirmed the country will achieve the 5.50% GDP growth target it set; yet, it remains to be seen then how the country will cope with its internal hurdles in real estate and rampant industrial overcapacity (steel)