S&P 500 can fall below 3,750 despite relief rally

By 16th May 2022The US

The value of home sales in China slumped 48.6% y/y in April. Rising unemployment combined with falling house prices and sales could auger a fresh wave of defaults across the real estate sector. China now risks descending into an economic and political crisis. The slide in the RMB and the political crisis engulfing China raises the risks of capital outflows.

The drop in industrial metals (now -1.2% YTD) suggests the global economic slowdown is more severe than stock markets are currently pricing. Agricultural commodities, by contrast, are up 30.4% YTD. The global wheat crop for the 2022-23 crop season is now projected by the USDA to fall for the first time in four years. The price of wheat shot up 5.9% this morning after India decided to halt most wheat exports over the weekend. We are entering an increasingly protectionist global environment.

The value of the cryptocurrency universe has collapsed by $1.611tr since the peak of November 8th, 2021. Major technology funds face big losses. Softbank has been hit hard by the bear market.

Cracks have appeared in the high yield $ corporate bond market. Spreads in the European junk bond market are widening too. Leveraged loans registered a steep decline on Thursday. Private credit is starting to roll over. The outlook for small business conditions hit a new low in April according to the NFIB. Pension funds have suffered a difficult start to the year and will be exposed to losses in private credit markets.

Overvalued property markets around the world are starting to deflate, including in New Zealand, Australia, and Canada.

Elevated food and energy prices are a risk for the US stock market, not just through the domestic monetary policy channel, but via JGBs. Japan is at a big risk of upside inflation surprises that could force the BoJ to shift its yield cap on the 10-year JGB higher. A persistence with the current monetary policy stance will otherwise force a further downshift in the yen, pushing up imported inflation. The import price index (yen basis) increased 44.6% y/y in April. If the 10-year JGB yield cap is let go, this could spark another bout of selling in US Treasuries.

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