At the current juncture, these are the critical points:
1) The June CPI report was a shocker. The Fed is hiking into a rapidly slowing economy because inflation was allowed to get out of control.
2) The ECB is hiking into a recession, triggered by an energy crisis. The EU is preparing legislation for gas rationing this winter.
3) China is refusing to cut rates as a mortgage crisis begins to unfold, heaping further pressure on its banking sector.
4) The surge in the dollar index is hitting emerging markets: high yield EM corporate bonds are sliding.
Put simply, none of this is positive for equities.
The Fed is now set to hike 100 basis points in July, and it could go with 75 or 100 basis points in September too. In any case, the market will move to price in further curve inversion for 2-10’s. We retain our view that this part of the curve could eventually invert, possibly by up to 100 basis points.
A European recession triggered by energy rationing is on its way. The EU is finalising a set of actions to mitigate the impact this winter from Russia cutting off gas supplies.
But China is emerging as the bigger risk for markets. The property crisis is intensifying, spreading from developers to banks. In what is a significant escalation of the current crisis, homebuyers across the country are now refusing to pay their mortgages, due to construction delays and a drop in the value of purchased properties.
