Opinion | Why have U.S. stocks adjusted sharply recently? What has changed in market logic?

Overnight (Tuesday), U.S. stocks experienced a major adjustment. The Nasdaq fell by nearly 4%, and the S&P 500 and the Dow Jones fell by more than 2%. Some of the major index heavyweights, such as Tesla and General Electric, fell. more than 10%.

At the same time, the 10-year U.S. Treasury bond fell to 2.73%, the U.S. dollar index stood at 102, and the VIX index also reached its highest level since the escalation of the Russian-Ukrainian situation in early March.

Since entering April, U.S. stocks have continued to pull back and basically reversed the rebound in March, again approaching the low point when the situation in Russia and Ukraine was the most tense in the previous period, superimposed on the recent continuous pullback of the Chinese market, showing that market risks and sentiment are obviously under pressure.

So, what signal does the recent correction in U.S. stocks send, and does it hint at the beginning of greater volatility? CICC’s latest comments on the overnight fluctuations in US stocks are as follows, for investors’ reference.

1. First of all, the volatility of US stocks overnight is affected by multiple factors, but from the combination of stocks falling and bonds rising, it can be seen that compared with the previous period, more attention has been paid to the Fed’s tightening. Concerns about recession risks . mainly reflects in:

1) The U.S. stock market will announce the performance of leading technology companies this week. The market is worried that the overall performance will be lower than expected. Under the background that the tightening of the Fed will lead to the pressure on the valuation, the market will lose its few reliance;

2) The Fed tightening is approaching, and the situation in Russia and Ukraine continues.

Judging from the current situation, the market does have reasons for caution. The ongoing situation in Russia and Ukraine, inflation has not yet seen an inflection point, and the Fed’s tough interest rate hikes are all pressures that the market has been trying to digest in the near future.

The continued disruption of the logistics supply chain and economic production activities by the epidemic seems to continue for some time, causing further concerns about the global growth prospects, especially the disruption of key supply chains such as automobiles and components, and electronic semiconductor supply chains.

At the same time, some leading companies disclosed less-than-expected results, which just gave investors a reason to sell.

2. In essence, it is a question of who comes first between inflation and the inflection point of growth.

The inflation turning point has not yet been seen, but the increase in concerns about the growth turning point is the underlying logic that investors are most worried about the market outlook. gradually loosen.

On the contrary, if the inflation inflection point gradually appears, it means that the Fed can continue to promote tightening in a relatively calm manner, and because the earnings fundamentals are still resilient at this time, it can provide a period of transition and support, although this transition is difficult to be smooth.

From the perspective of the fundamentals of the United States, the current arrangement is relatively stable . On the macro level, the newly disclosed April PMI initial value of the manufacturing industry has improved, and supply contradictions such as delivery time have improved, which is significantly better than that of Europe. The recovery in industrial output and durable goods orders in March also showed a gradual recovery in production activity and supply in the post-pandemic period.

At the same time, travel and consumption activities have also picked up significantly after the epidemic has eased, which can be reflected in the sharp rise in the prices of related services in the March inflation data. In terms of profitability, the recently disclosed first-quarter results are mixed, especially the lower-than-expected performance of some leading companies, such as Netflix, Google, etc., which has caused market concerns. However, 80% of the companies are still exceeding expectations, judging from the 30% of the performance that has been disclosed so far.

Therefore, it can be seen that the fundamentals of the United States still have a certain underlying resilience under the benchmark scenario. The market is worried about whether the rapid tightening of the Federal Reserve and the impact of the local epidemic will accelerate the arrival of the inflection point of growth. .

However, the inflection point of inflation has not yet arrived, making it impossible for the market to completely dispel fears of further acceleration of tightening and price backlash. In fact, recently, CICC has noticed some signs of gradual easing of supply contradictions in the United States, such as the decline in delivery time in the PMI index, the increase in industrial industry and capacity utilization, the replenishment of channel and terminal inventory, and the decline in used car prices.

However, the surge in oil prices caused by the situation in Russia and Ukraine greatly offset the month-on-month decline in core commodity prices in March, and instead pushed up inflation to a new high. Interest rate hike expectations (currently, the expectations included in CME interest rate futures have been close to 10 times a year totaling 275np, and the 50bp interest rate hike in May is expected to be close to 100%).

From this perspective, it is not difficult to understand the evolution of the US stock market, sectors and various assets under the recent emergence of some new variables.

3. Looking ahead, based on the current situation, the “apparent” inflection point of CICC’s tendency to inflation may still come first . This will not interrupt the Fed’s tightening rhythm, but it can alleviate some concerns about exceeding expectations and accelerating tightening. , especially given that asset prices are now pricing in too much tightening expectations. At this time, growth may still be a long way from a real recession, thus providing a relatively “ friendly “ environment for the market.

However, such an assumption based on the current situation does have variables, and more evidence is needed for the market to verify. CICC believes that the main verification point is around the beginning of May , focusing on the following changes:

1 ) Whether the Fed’s May FOMC meeting (May 5) exceeded expectations, considering that there are already many expectations included in the futures market and asset prices (50bp hike in May, 75bp in June, and another 50bp hike in July) ), if the information of this meeting does not further exceed expectations, it may be an expected fulfillment for the market;

2 ) Can the US non-farm payrolls announced in early May and the inflation announced in the second week see an inflection point? Oil prices remain around 100 and will drop sharply from March compared to March (“High Inflation Series III: When Oil Prices Remain High”), used cars Prices are also expected to continue to cool down and drag down core commodities, while the base will continue to rise, so the key is to see how strong the core services (travel and rent) are;

3 ) US Q1 results and guidance.

CICC believes that there is a general possibility of realizing the above-mentioned benchmark scenarios. If it can be delivered, it will help to moderate the current fears and volatility in the market. In addition, the tightening expectations included in the short-term US bond interest rate are a bit too much, but it may be difficult to effectively fall before the policy is implemented and the inflation turning point occurs.

If it can be fulfilled, CICC is expected to ease the rhythm for a while, and then gradually increase with the subsequent process of shrinking the balance sheet and raising interest rates, until the fundamentals are obviously under pressure and then fall back. In terms of point, if the interest rate is raised according to 250bp for the whole year, it will probably correspond to the central 2.7~2.8%; this round of central view may be 2.9~3.2%, corresponding to the real interest rate of 0.3~0.4% and the inflation expectation of 2.5~2.8%.

In terms of allocation suggestions, before the situation in Russia and Ukraine is effectively alleviated and China’s stronger-than-expected efforts to stabilize growth, CICC still recommends seeking benefits or protection from relative certainty, maintaining the logic in the April report on overseas asset allocation:

1) The developed countries are still better than the emerging ones, and the volatility of US stocks increases in the stage of interest rate hike;

2) The U.S. dollar may remain strong, and the exchange rates of some emerging markets, including China, may be under pressure in stages;

3) The inversion of the Sino-US interest rate gap is still likely to continue, and the US bond interest rate may have a temporary respite after waiting for the FOMC to land in May and the inflation turning point

4) Commodities were flat as a whole, and gold was short and long.

This article is reprinted from: https://news.futunn.com/post/14921395?src=3&report_type=market&report_id=204119&futusource=news_headline_list
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