The drop in the indicator quickly erased the bounce since mid-June that a team at Goldman led by Peter Oppenheimer described as a “bear market rally”.
“Its duration and magnitude were not unusual relative to the experience of previous decades,” the strategists wrote in a note. “We expect more weakness and choppy markets before a decisive bottom is established.”
The MSCI All Country World Index has fallen 9% since mid-August and would hit pandemic lows in 2020 if it sinks to June’s trough. A number of risks, including the monetary tightening of the Federal Reserve to fight inflation, the energy crisis in Europe and the economic slowdown in China, are at stake.
“The short term is bearish and September and October is when markets tend to drop sharply,” Chris Wood, global head of equity strategy at Jefferies LLC, said on Bloomberg Television.
Some technical metrics suggest a pause in the decline is possible. Over the past two decades, the MSCI All Country World Index has risen an average of at least 1% over 10 and 20 days after nine-day losing streaks, according to data compiled by Bloomberg.
For now, caution appears to be the watchword: a strong dollar swept through global markets on Wednesday, Treasury yields held higher on expectations of a dovish Fed, and an index of Asian stocks fell to levels not seen since 2020.
The great unknown remains “inflation and how central banks have to react to this”, said Joyce Chang, global head of research at JPMorgan Chase & Co., on Bloomberg Television. “We’re preempting all these moves by central banks, so at what point can they pause, really sit back and see where inflation settles?”
Goldman economists forecast a one-in-three chance of a recession over the next year, and “history shows that value stocks do better at the start of recessions,” the strategists wrote.
black rock
Experts increasingly recognize that the macroeconomic data in the different developed countries of the world suggest that we could face a recession in the short-medium term. And this, according to BlackRock, “This is bad news for risk assets.”
The manager expects the European Central Bank (ECB) to raise rates by 75 basis points at its meeting on Thursday, thus following the same super hawkish strategy of the US Federal Reserve (Fed).
“For some time we have been warning that we are in a new macro regime. At the recent Jackson Hole symposium central bankers recognized this reality. BlackRock notes in its latest weekly report.
“But we believe that they do not recognize the reality when it comes to prioritizing the economic implications over the pressure to curb inflation. And there is a strong trade-off between inflation and growth. This is a big problem”, say these experts.
“We believe that bringing inflation back to central bank targets means sinking demand with a recession. That is bad news for risk assets in the short term”, they reiterate.
At BlackRock they are very clear: “The US economy has already stalled. Now we see a recession early next year. Powell made it abundantly clear at Jackson Hole that the Fed has no intention of reversing its rate hike cycle for now. The problem is that rate hikes will not solve the biggest problem: low production capacity (see the green dotted line on the chart). The only way the Fed can bring inflation down quickly is by raising rates enough to force demand (orange line) down about 2% to what the economy can comfortably produce now. That is well below the pre-Covid growth trend (pink line).”
“But the Fed has yet to recognize the huge cost to growth”they warn.
“The Fed will be surprised by the damage to growth caused by its tightening. When the Fed sees this pain, we think it will stop raising rates. We think that by then it will be too late to avoid a contraction in economic activity”, these experts sentence.
Source: Ambito
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