Strong Start For Equities
Navigating the next cycle
Where to start? There’s a good investing quote that says “be fearful when others are greedy and to be greedy only when others are fearful”. Now I agree with this saying, to some extent.
It’s easier said than done to observe the masses and do the opposite, however, when you are a retail or institution investor that has fully deployed capital into the markets choosing to be the conservative investor becomes increasingly difficult when you’re not sitting on cash.
YTD U.S equities have slumped. 20%+, so it’s official. We’re in a bear market…
It’s the same story repeating again, that is investors’ risk appetite increases upon hearing positive economic releases, then fears about multi-decade high inflation figures and talks about recession spark further capitulation in markets. This is and will continue to be reflected in leading economic indicators such as consumer confidence which shows consumers’ sentiment towards their financial conditions and future.
Yesterday we saw strong demand for high-risk assets after all three major U.S index funds closed higher. 10Y treasury was subdued below the 3% mark closing below 2.8%.
Lagard confirms ECB road to a rate hike
The President of the ECB is keen on making a move after 8 years of negative rates. In case you’re not familiar with why central banks use negative rates, here’s an explanation.
Simply put the world runs on credit, credit cards, business credit agreements, mortgage credit, everything. Now each domestic central bank governs the ease of access to credit within the economy through interest rates. A low rate environment encourages consumers and businesses to acquire debt to boost economic activity. For every dollar of debt, you or I may acquire, that becomes another person’s income (asset). So from this cycle repeating itself on a larger and more complex scale, we create an environment where personal income and levels of debt rise creating a landscape which births economic development. This has pros and cons as you can imagine, something I’ll touch upon later.
The ECB has held rates at -0.50bps rate for a number of years but with 40-year high inflation, Lagarde is preparing to take a step against it at the next ECB rate decision.
Providing we see the anticipated move towards a hike we can hopefully see the euro hold its ground as analysts are now calling for eurodollar rates to reach parity.