Market Forecast - Mixed Signals
Reviewing market happenings this past week as well as what's to come. Lots of mixed signals this week.
At a Glance
The Unstoppable TikTok
The Short: TikTok continues to rapidly grow users, defying expectations of slowing growth as lockdowns ease.
The Long: According to a recent article from CMSWire, no platform (besides Facebook's early years) has grown as fast as TikTok is growing today. Many were expecting its growth to stall as lockdowns ease but the platform is defying expectations. It continues to relentlessly sign up new users and consume more of their attention. Besides user growth, the platform is also cranking up monetization. Last year, TikTok pulled in almost $4 billion in revenue and they’re projected to triple that this year to $12 billion.
Europe Is Losing the Inflation War
The Short: The euro € just hit a 20-year low against the US dollar $.
The Long: The European Central Bank can’t keep pace with the Federal Reserve with interest rate hikes. As a result, the euro is cratering. Currency investors are ditching it for the dollar which earns a significantly higher interest rate. So why can’t the ECB raise rates? The bank’s hands are tied from the skyrocketing bond yields of economically weaker EU nations like Italy. Despite Eurozone inflation hitting 8.6% in June, the ECB hasn’t even begun raising its interest rate (currently at -0.50%) and they’re only contemplating a 25-basis-point hike in July! To make matters worse, a falling euro exacerbates inflation as imports get more expensive.
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Home Prices Start to Fall
The Short: Home prices are finally starting to fall after the US 30-year fixed mortgage rate more than doubled from 2.65% in January to 5.70% today.
The Long: The housing market is illiquid and thus slow to react to interest rate changes. Selling a house is a long and arduous process. In addition, prospective sellers can choose to live in a house for a bit longer and only sell once the market is favorable. The lagged reaction of home prices to interest rate changes means that the best time to buy is when rates have just fallen, and the worst time to buy is when rates have just risen.
Stocks Fall at the Start of Each Month?
This chart is interesting. Amidst the overall market sell-off this year, we ended every month with a bear market rally that was swiftly sold off at the start of the next month.
Will this trend continue in July? We don’t know. There are too many mixed signals right now.
Market Forecast
Oil crashed by almost 10% today to just under $100. The sell-off, which started at exactly 9am Eastern, was likely caused by Citi’s warning that a recession could cause oil to fall to $65 per barrel by year-end.
Energy prices affect almost every component in the CPI and when they fall, it bodes well for inflation. However, several macroeconomic factors suggest that this is likely a short-term downtrend.
Oil Production - Eastern Europe 📉
The war in Eastern Europe is escalating with Russia capturing Lysychansk. This effectively eliminates all opposition resistance in the strategically important Luhansk region. Meanwhile, Sweden and Finland are being rushed into NATO after the Turks withdrew their objection last week.
JPMorgan warned yesterday that global oil prices could surge 240% to $380 a barrel if Russia slashed production by 5 million barrels a day. The bank thinks the country can pull this off without majorly hurting its economy. Russian coffers have been filling up from high energy prices despite significant sanctions. Will Russia cut oil production in retaliation to Sweden and Finland joining NATO?
Russia was worried enough about Ukraine joining NATO that they launched the first major land invasion in Europe since World War II. Imagine what they'll do when Sweden and Finland join NATO.
Oil Production - Middle East 📉
As we’ve mentioned before, Biden is meeting Crown Prince Mohammed bin Salman in Saudi Arabia in mid-July. He hopes to repair US-Saudi relations to get OPEC to increase oil production and drop global oil prices.
This visit is awkward.
When Biden entered the office, he pledged to make Saudi Arabia a “pariah” for the Khashoggi assassination. This came on top of the Democrats’s increasing hostility to fossil fuels, the kingdom’s primary source of wealth. Will Biden’s reluctant visit to the kingdom be enough to satiate the shrewd but prideful Crown Prince?
We don’t think so. Biden is approaching MBS from a position of weakness, and there might be too many Saudi grievances against the Democrats for MBS to play nice. Besides, Saudi Arabia has found an alternative to US patronage in the east. That's right, Chinese patronage.
We’ll deep dive into the Saudi Arabia situation in a future newsletter issue.
Oil Production - Europe 📉
Energy production isn’t going so well in Europe either. Yesterday, Norwegian offshore workers began a strike demanding wage hikes to offset rising inflation.
Talk about a Wage-Price Spiral.
Norway is one of the EU’s largest oil producers. The situation has deteriorated enough that Norway could cut off gas exports to the UK this weekend.
The Forecast
Today’s oil price crash is a promising start for a market recovery but there are still too many mixed signals to call a market direction.
The top upcoming macroeconomic events that we’re worried about are:
An escalating conflict in Eastern Europe
Biden’s meeting with MBS being ineffective in raising OPEC oil production
June’s CPI print, released on July 13th
S&P500 companies comprising $21 trillion in market cap will report earnings this month. Margins are likely to be squeezed from inflation
We are still deeply in a zone of uncertainty. There are so many things in flux that could significantly tip the scales. Hold tight and keep your risk low.