With many markets closed for a few days either side of the weekend and market liquidity very low, financial news has been mercifully subdued. There was mini-scare at the end of last week as a number of jobs-related reports came out which suggested that the overheating US economy might be slowing down. With many markets closed for a few days either side of the weekend and market liquidity very low, financial news has been mercifully subdued. There was mini-scare at the end of last week as a number of jobs-related reports came out which suggested that the overheating US economy might be slowing down. At first this got investors thinking about bad news actually being bad news (rather than just an excuse for lower interest rates i.e. ‘bad news is good news’). But then as yields did actually fall, Pavlovian responses kicked back in and US markets recovered, with the S&P 500 flat for the last week and the Nasdaq just down 1% for so. Market participants are also looking for indicators of when the US consumer will stop spending, so when Costco announced that monthly sales in March were its lowest since the advent of lockdowns, it caused a tremor. Overall defensives like utilities and healthcare did better (actually up by a few percent) while tech stocks (despite lower interest rates) and cyclical industrials were down a few percent. Overall, the Dow Jones Industrial Index is up for the month, a period when recession fears have come to the fore, while the Nasdaq is down, indicating that the market now sees tech stocks as more leveraged to the overall economy (for instance via advertising revenue) rather than as a safe haven.  

Just about every other major market (apart from Japan) remained in positive territory, and most are up a few percent, including most emerging markets. This underscores the point that all eyes remain on the US, and US tech stocks remain the lightning rod for risk sentiment. Investors remain confused about Japan given the huge amount of debt and dysfunctional debt markets, especially if inflation sticks around. It has the highest level of national debt in the developed world at over 260% of GDP, and the Bank of Japan owns half of it (so it is very, very illiquid). The Bank of Japan has been trying to incite a modest level of inflation in the economy but many worry that they might end up like ‘the dog that caught the car’ if that ends up causing chaos in bond markets. On the other hand, Japanese companies are doing very well, and fund managers see enormous value in cheap Japanese stocks with great fundamentals. The market actually recovered in the last few days, mainly because Warren Buffet flagged that he would be increasing his stake in Japanese companies he already owns and perhaps buying into a few more.

Gold seems to be benefiting from its safe haven status as talk of an impending recession intensifies. It surpassed $2000/Oz for the first time since July 2020, and is now just a few dollars off its all-time highs. However, the even greater beneficiary of increased interest in gold was the Australian market, which is up by half a percent over the last week, entirely due to a takeover bid for a local gold miner, Newcrest Mining, by it’s Canada based global competitor Newmont. Newcrest was up 30% on the announcement, as was it closest local peer Northern Star Resources, and a host of other smaller miners.    

Against all this talk of recession, bond yields around the world actually edged up slightly, while inflation expectations (for a year or two from now) remained stable at around 2.5%. Credit spreads eased down slightly as well, and commodity prices were stable. All of this suggests that either not many people were trading around the Easter break, or overall the markets are a little more sanguine, or they have at least priced in a modest recession already. This week’s US CPI print had been much anticipated, but was in the end a mixed affair that suggested that, once the deflationary effects of falling energy prices are stripped out, inflation is heading in the right direction but not very quickly. We discuss this in more detail below, but the upcoming US corporate reporting season, which starts in earnest next week, is likely to be even more eagerly anticipated by avid recession watchers and is something we will no doubt spend more time on next week.

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