In ‘Talking Points This Week', Niraj Shah studies how top business leaders and market makers are navigating the fast-changing financial landscape.
While this week was characterised by more of what's battered markets in recent times—worrying inflation data, Covid-19 cases rising in different parts of the world including India, China lockdowns continuing to infuriate its citizens—it was also a week where we saw equity markets rise, yields stabilise, and oil correct a little. Splashed across global news platforms was coverage of the Johnny Depp-Amber Heard defamation trial outcome, but... no, that is not on our list!
Caution! Speed Breakers Ahead
A top Goldman Sachs executive has echoed JPMorgan CEO Jamie Dimon's pessimistic outlook, warning of tougher times ahead, amid a string of shocks rattling the global economy. Goldman President John Waldron said that the confluence of shocks to the system is unprecedented.
Earlier in the week, Dimon had warned of an economic hurricane ahead. This, at a time when BlackRock CEO Larry Fink said that he expected inflation to remain elevated for several years.
Back in Asia, Samir Arora of Helios Capital says that he is cautious on the Indian markets as well, with a mindset that unlike 2008—where small trend changes led one to believe that negatives were priced in—this time around, things do not look rosy.
A Bounce Amidst The Speed Breakers
Bonds in almost every corner of the $63 trillion global debt market are bouncing back as investors begin to see value in fixed income assets once again. Global investment-grade debt returned almost 1% in May, the first monthly gain since July 2021, while emerging-market sovereigns from Mexico to Malaysia are also in the green. Investors point to a bevy of reasons for the bond recovery. These include signs the global economy is in danger of recession, speculation that the rush of central bank interest rate hikes is now largely priced in, and the simple fact that yields have risen enough to make them attractive.
It's not just bonds, equities have been on the gaining side too. The S&P 500 is up nearly 5% in the five-day period preceding Friday, the German DAX index has been steadily rising since its May 9 low, and in India, the Nifty too has shown encouraging signs with positive market breadth in the last seven sessions.
Whether it is a dead cat bounce or a sustainable one, only time will tell. There are some positives in that corporate earnings in India have been quite resilient with the Nifty EPS for Q4 FY22 coming in on broadly expected lines at Rs 207, up 10% QoQ and YoY, as well as OPEC+ committing to raised production, in order to balance out a lack of supply from Russia. Are these enough? Maybe not.
25 Or 50 In Europe?
Following the U.S. Federal Reserve's hawkish stance on its policy rate, speculations are high that European Central Bank may raise rates too. In recent weeks, key ECB officials have been busy publicly airing their views on when and how the central bank should halt its asset purchases and begin raising rates. Although there seem to be some differences of opinion, policymakers appear to have converged towards the idea of completely ending QE in early July and hiking rates later that month.
The only remaining niggle between some EU policymakers is whether or not the ECB should opt for a 25-bps rate rise or a more aggressive 50-bps one. In light of this, the Eurozone inflation data for May released on Tuesday assumes tremendous significance as inflation in the region hit its highest level since the creation of the common currency in 1999. It shot past expectations of a 7.7% print as price rises continued to broaden, indicating that it is no longer just a case of energy pulling up the headline figure. The Russia-China combination of oil disruption plus supply chain snarls is hitting the Eurozone severely.
Have Battery Metals Peaked?
Goldman Sachs says the bull market in battery metals is finished, for now, forecasting that commodities like cobalt, lithium, and nickel will fall in the next two years. Goldman's analysts believe that investors who sought exposure to the green energy transition piled in too quickly. They say that investors are fully aware that battery metals will play a crucial role in the 21st-century global economy, and that fundamental mispricing has, in turn, generated an outsized supply response well ahead of the demand trend.
Strategists believe that there will be a sharp correction in lithium prices, with the metal averaging under $54,000 a tonne this year, down from a spot price of over $60,000. It will fall further to an average of just over $16,000 in 2023, as per the Wall Street bank. The Goldman team sees cobalt to probably drop to an average of $59,500 a tonne next year from around $80,000 now. Meanwhile, nickel is likely to rise almost 20% over the rest of this year to $36,500 a tonne before fundamental pressures drive it lower again, the analysts forecast.
“This phase of oversupply will ultimately sow the seeds of the battery materials supercycle over the second half of this decade. Then, the demand surge will more sustainably overcome current supply growth.”
- Goldman Sachs
By The Way
While Western Europe and the United States remain regions of concern for Covid-19 cases, there's been a notable uptick in India too, with cases doubling in high-density areas like Mumbai and Delhi. Masks may become mandatory again in Maharashtra. It is only recently that restaurants and theatre owners are starting to see their businesses revive. One only hopes that the rising cases don't disrupt a revival that was starting to form after 24 long months.
Niraj Shah is Markets Editor at BQ Prime.
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