Q2 to Test Resilient Stocks, Inflation Peak: Global Market Themes for Week Ahead

As the second quarter unfolds, the bigger question is when runaway inflation will finally peak.

Federal Reserve minutes and a meeting of the Reserve Bank of Australia will provide insight into the thinking of rate setters. The resilience of equities and the Russian ruble could be tested.

Here is your week ahead in the markets:

FED UP

Federal Reserve Board Chairman Jerome Powell speaks during lunch at the 2022 NABE Economic Policy Conference at the Ritz-Carlton on March 21 in Washington.Samuel Corum/Getty Images

Judging by the inversion, albeit brief, of a closely watched portion of the Treasury yield curve, US recession risks are rising.

An inverted curve has a strong track record for predicting recessions, but how to interpret recent bond movements presents a conundrum for investors. After the Federal Reserve meeting on March 16 offered a glowing assessment of the economic outlook, stocks are taking the bond sell-off in stride.

On Wednesday, the minutes of that Fed meeting should show how politicians see the picture. They have already signaled larger rate hikes to rein in inflation, which is at a four-decade high. Details about how quickly the Fed could shrink its $9 trillion balance sheet, a risk some believe markets are underestimating, would also be key.

WHEN PIGEONS BUY

A man walks past the Bank of Japan headquarters in Tokyo, Japan, on May 22, 2020.KIM KYUNG-HOON/Reuters

The Bank of Japan has put its money where its mouth is, demonstrating its position as the world’s most dovish major central bank. His standing offer to buy benchmark government bonds signals a powerful defense of his policy of yield curve control.

The effect of that binge is debatable: Yields have only dipped slightly from six-year highs, and that possibly had a lot to do with the drop in US Treasury yields from multi-year highs.

And there is a collateral victim of the BOJ’s big easing: the yen, which has reached depths not seen since 2015. While the BOJ maintains that a weaker currency is generally positive for the economy, the puzzlement of a row of government suggests a different opinion.

Meanwhile, Australia’s central bank meets on Tuesday and while no policy change is expected, the bank may go further in laying the groundwork for a rate hike. Markets expect one around June.

BOUNCE CAPACITY

A trader works on the floor of the New York Stock Exchange (NYSE) on March 30.BRENDAN MCDERMID/Reuters

Two weeks ago, Wall Street’s S&P 500 and MSCI’s main global stock index were down 14% for the year and the Nasdaq was officially in sub-20% “bear” market territory.

Now? Although the war in Ukraine continues and interest rates are on the rise, the S&P 500 is back within 5% of its all-time high, the MSCI World has regained half of its decline, and the Nasdaq is down a more manageable 8%.

Analysts hope that as the dust settles, corporate profits will still look good and the dreaded “stagflation” scenario will be averted. TINA, or There Is No Alternative, is still alive and looking good.

The next earnings season is upon us, but if the Russia-Ukraine crisis leads to a new Iron Curtain, stocks will find it harder to defy gravity.

REAL REBOUND?

An illustration of a picture shows Russian ruble bills of various denominations on a table in Warsaw, Poland, on January 22, 2016.Kacper-Pempel/Reuters

The ruble has staged a remarkable recovery from record lows reached in the days following the Russian invasion of Ukraine on February 24. In onshore and offshore markets, where Western institutions trade with unauthorized Russian entities, the ruble is almost back to where it was before the invasion.

The increase is due in part to capital controls that suppressed the sale of rubles and artificially inflated the currency. But there is also a genuine improvement in Russia’s balance of payments as imports collapse and rising energy prices boost export earnings.

President Vladimir Putin’s demand for ruble payments for gas, and if European buyers agree, could be the next test of whether demand for the currency is real or designed.

THE END OF AN ERA

The headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on December 30, 2021.WOLFGANG RATTAY/Reuters

While the US yield curve inverted, a sea change was underway in eurozone bond markets with two-year yields on Germany, France and the Netherlands breaking above 0% for the first time. time since 2014.

Yields across the bloc ended March with their biggest monthly rise in around a decade, on expectations the ECB will soon boost its deposit rate from minus 0.5% to 0% and higher.

That would be a watershed moment for negative-yielding debt, whose global volumes topped $18 trillion in 2020. Savers, banks and pension funds should benefit; risky corporate debt and emerging markets that benefited from investors’ “hunting for yield” may lose out.

But calling for a change in trend in these volatile times is not easy. The next few days could show whether the yield’s moves above 0% are indeed durable.

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