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High inflation hits U.S. stocks

  Tighter financial policy to curb inflation could hit growth and fuel investor fears of a recession.
  U.S. inflation continued to hit a 40-year high, and U.S. stocks suffered a sharp sell-off.   The U.S.
Department of Labor announced that the consumer price index (CPI) in May rose by 8.6% year-on-year, the largest year-on-year increase since December 1981, and the expected value was 8.3%; the May CPI rose 1% month-on-month, higher than expected
0.7%; the core CPI, which excludes food and energy prices, was 6% on an annual basis, compared with expectations of 5.9% and a monthly rate of 0.6%, which was higher than market expectations of 0.5%.
  U.S. President Biden delivered a speech, reiterating that fighting inflation is his top economic priority, blaming the persistently high inflation on the conflict between Russia and Ukraine and the accumulation of money by oil giants. He said the oil, gas and refining industries should not use the situation in Ukraine as an excuse to make excessive profits or raise prices to make it worse for American households.
  U.S. Treasury Secretary Yellen warned that the U.S. could face a prolonged period of high inflation. Some investors worry that tightening financial policy to curb inflation could hit economic growth, fuelling fears of a recession.
  The World Bank slashed its forecast for global economic growth, noting the risk of recession in many countries.
  More than 40% of CFOs
  cite inflation as the number one external risk to their business and expect 10-year Treasury yields to reach 4% by year-end; more than half of CFOs say the energy sector will Be the fastest growing industry in all economic sectors over the next 6 months.
  Barclays deputy chief U.S. economist Jonathan Millar said in a report that the Fed has good reasons to take more aggressive measures in the near future.
  ”The latest CPI report shows stronger prices across all components, and we believe the latest developments will force the Fed to raise rates by 75 basis points in June,” Miller said.
  Wells Fargo expects the Fed to raise interest rates by 50 basis points in three consecutive meetings in June, July and September.
  Fed observations show that U.S. interest rate futures are priced in that the Fed will increase interest rates by about 215 basis points in 2022, with the federal funds rate at 2.985% at the end of December.
  The 2-year U.S. Treasury bond yield, which is the most sensitive to the Fed’s interest rate adjustment, once rose above 3%, the highest level since June 2008; the 10-year U.S. Treasury yield rose to 3.18%.
  Hit
  Confidence Rising prices hit consumer confidence. The University of Michigan’s consumer confidence index reported a preliminary value of 50.2 in June, the lowest since records began in the 1970s, far below the previous value of 58.4 and the expected value of 58.1. For the whole of 2019, that is, before the outbreak, the average of the indicator was 96.0 .
  In a statement, Joanne Hsu, director of the survey, said consumers’ assessments of their personal finances had deteriorated sharply, with nearly 46 per cent of respondents attributing this to continued price pressure. “While consumer spending has remained strong so far, a deterioration in sentiment could lead them to cut back on spending, thereby slowing economic growth.”
  Prominent economist El Erian said the Fed must act now and boldly to restore confidence in containing inflation.
  The Allianz chief economic adviser said aggressive rate hikes could help restore the Fed’s credibility. He added that the stock market would initially react negatively but quickly rebound.
  Elian said the risk of interest rates and inflation could be removed by raising rates sharply and sending a clear signal, but credit risk had to be addressed.
  Looking for Opportunities Investors have been assessing the health of the U.S. economy in
  recent weeks, with some economic data pointing to slowing growth.
  Andrew Slim, a senior portfolio manager at Morgan Stanley Investment Management, said stocks will head higher this year from here, but the summer could be bumpy and the May lows will be a key area of ​​focus.
  At a time when both stocks and bonds will struggle in 2022, the Fed is the market’s biggest risk as it seeks to use “powerful” tools that “lack subtlety”, according to a mid-year outlook report from Citigroup’s wealth management business. fight inflation.
  Specifically, David Bailin, chief investment officer of Citi Global Wealth, said that investors are now trying to judge whether the U.S. economy is going through a period of slow growth that avoids contraction, or is heading toward excessive monetary policy tightening by the Federal Reserve to combat high inflation. induced recession.
  ”There’s uncertainty about both outcomes, and what we’re doing is focusing on creating a resilient portfolio of stocks,” Bailin said.
  He said Citi likes larger, dividend-paying stocks because they usually It does better when the market is down, and it does better when the market is recovering.
  Citi also invests in healthcare stocks because of their low “relative” valuations, high dividends and a tendency to perform well in any economic environment, he said.
  Citigroup said in its mid-year outlook that the economic expansion is expected to continue if consumption remains strong and the Fed can “moderate its current aggressive stance against inflation.”
  Citi said: “Discretionary consumer spending may be the most vulnerable part of the economy, and it will only be so if inflation continues to rise rapidly. More and more spending power is going to food on the table, heating and Refrigeration, and fuel for cars. And there is less money for discretionary items like dining out, electronics and overseas travel.”
  Citi expects U.S. inflation to fall to 3.5% in 2023.
  Bailing sees retailer Target’s excess inventory as a sign that supply is recovering while demand for the item is falling, meaning the supply chain woes that have driven prices up over the past two years may “not be an issue anymore. , because the economy is now commodity-oriented.” Part of the high inflation could be resolved through a “natural combination” of supply and demand, he said.
  He also said that geopolitical factors limited the Fed’s ability to control inflation. “The Fed can only destroy demand”. To curb inflation, the Fed is trying to cool the economy by raising interest rates and shrinking its balance sheet.
  Citi said in its report that quantitative tightening was “a reversal of its accommodative credit policy, which has secured capital flows in 2020-21.” “If the Fed raises rates too high, too fast, and also reduces market liquidity, it could lead to a U.S. recession. Right now, they’re very aggressive and that’s spooked the stock market.”
  Citi also noted “: We’re cannibalizing the tech industry right now.”
  Citi is evaluating a “huge opportunity” to find companies with “significant revenue growth” at valuations close to 2019 levels.
  Citi is also bullish on cybersecurity and fintech stocks because companies in those areas will be investing over the next 10 years, Pailin said.
  Air Squeeze

  The Wall Street “short-squeeze war” that once caused a sensation in the global capital circle seems to usher in a sequel.
  The short-selling agency that was once “exploded” by the US retail investor group has made a comeback again and is eyeing retail investors holding group concept stocks.
  According to the latest data from S3Partners, a financial data company, as of now, the net short positions of Game Station (GME) and AMC Cinemas account for 24% and 22% of the stock circulation, respectively, which is close to the highest level in a year.
  Wall Street analysts pointed out that the current sudden and aggressive shorting of hedge funds may be based on the widespread sell-off in U.S. stocks. American individual investors have suffered serious losses, so their short-selling attitude has become more aggressive.
  Since 2022, the Nasdaq Composite Index has fallen by 27.5%, falling into a bear market. The S&P 500 Index has also fallen by 18.2% during the year, while Game Station and AMC Cinemas, which have been widely shorted by Wall Street institutions, have their biggest declines during the year. 47%, 64%.
  According to Wall Street investment bankers, the target price of AMC Cinemas by short sellers is only $4 per share, a potential decline of 66.5% from the current share price ($11.95).
  But short sellers seem to have underestimated the purchasing power of U.S. retail investors, who seem to have begun to buy the dip. U.S. retail investors are willing to get in when markets are falling sharply, buying stocks at bargain prices, according to JPMorgan Chase & Co., who pumped $2.8 billion into the market in the week ended June 1.
  In this regard, Charles Lemonides, head of hedge fund ValueWorks LLC, said that the recent actions of the US retail investor army may make fund managers pause the pace of aggressive shorting.
  With such a high proportion of short selling by Wall Street short-selling agencies, it seems that the operation of Game Station and AMC Cinemas will fail completely.
  However, in terms of performance, the operation of Game Station is not bad. Its quarterly results announced on June 1 showed that the scale of revenue significantly exceeded market expectations, but the loss was expanding. The loss per share was US$2.08, compared with a loss of 1.01 in the same period last year. USD/share.
  Another short-selling listed company, AMC Cinemas, its quarterly report released in May showed that its revenue and profit performance exceeded expectations, but it was also in a state of loss.
  It is worth mentioning that, as the leading company in the US cinema chain, AMC is benefiting from the recovery of the US film and television industry. Its new film “Top Gun 2: The Lone Ranger” was released in North America less than 2 weeks ago, and the box office revenue has reached 291 million US dollars. It is predicted that the film could eventually gross more than $1 billion in total and help bring American consumers back to theaters.
  In this regard, Alicia Reese, an analyst at investment bank Wedbush Securities, said that the current time point does not seem to be a good time to short it. The short bets by short sellers are largely based on pessimism among U.S. retail investors.
  Looking back at the Wall Street “short-squeezing war” a year ago, American retail investors held a “showdown” against Wall Street hedge funds. According to data from financial analysis firm S3Partners, in the first five months of 2021, institutional investors who made big bets against the two stocks of Game Station and AMC Cinemas suffered a cumulative loss of more than $10 billion.

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