In his latest note – GREED & fear- Chris Wood of Jefferies says that conditions for financial markets remain the inverse of Goldilocks. He says that stagflation appears to be ever more a reality while the world is now looking at the potential for the worst nuclear crisis since the Bay of Pigs invasion in 1961 and the subsequent Cuban Missile Crisis in 1962.
As for the financial markets, he says that the key variable, for now, must be the price action in oil. He notes that in some ways, it is remarkable that it is not higher. One reason why not is that both Europe and America are for now still buying Russian oil and gas.
The really nasty outcome for Wall Street-correlated world markets would be if government bonds and equity prices decline together for an extended period. He says that such a negative outcome would be the reverse of the risk parity trade which was so dominant in the 12-year period between the global financial crisis and the arrival of the pandemic. However, he observes that the lack of outflows out of US domestic equity ETFs year to date remains remarkable. US domestic equity ETFs have recorded net inflows of US$65bn so far this year.
Chris Wood says that a change of monetary stance is, in the first instance, most likely with the ECB since the Eurozone is clearly more directly impacted. Indeed ECB tightening expectations have already started to decline. The money markets are now expecting 21bp of ECB rate hike this year, with the first hike likely in October, down from 38bp last Wednesday and 52bp in mid[1]February. As for the Fed, the money markets are now expecting 140bp of tightening this year, down from 162bp prior to the launch of the Russian invasion.
