A trader works on the floor of the New York Stock Exchange (NYSE) in New York, June 13, 2022.
Brendan McDermid | Reuters
Global equity markets diverged on Tuesday following a worldwide sell-off in the previous session, as analysts assessed the longevity of the bear market and the risk of a recession.
US stock futures rise again in early pre-market trading on Tuesday after S&P 500 slipped back into bear market territory the previous day.
Investors await a landmark monetary policy announcement from Federal Reserve on Wednesday, with bet on interest rate hike 75 basis points rise in the light of a shock 8.6% in annual inflation for May.
The prospect that the Fed and other central banks will be forced to raise interest rates more aggressively to contain inflation – at a time when growth is slowing in most major economies – has raised concerns about a global recession.
Profit recession
Guy Stear, head of EM and credit research at Societe Generale, told CNBC on Tuesday that while a recession looks more likely, there are two aspects to consider.
“One is the pure economic outlook, and the second is the earnings outlook. I’m actually more worried about profits than I am about economic growth,” Stear said.
He said the more than 25-year trend of profits rising as a percentage of GDP was “more or less over”, as ongoing themes were de-globalisation, energy and higher input costs and better wages.
“So I think no matter what happens in terms of the economic outlook – and yes, the possibility of a recession is growing – the likelihood of a recession in profits is going to grow a lot faster.”
Central banks ‘start to panic’
As well as the Fed, the Bank of England, the Bank of Japan and the National Bank of Switzerland are all set to announce monetary policy decisions this week. Each country is facing its own economic challenges, along with global problems of rising food and energy costs, and supply chain disruptions.
“What we are seeing right now is that central banks are starting to panic, markets are clearly facing a new era of higher interest rates, so what we are seeing now is a new era of higher interest rates,” said Carsten Brzeski, global expert. we have this big stock market correction, I think it is. head of macro at ING.
“With central banks now tightening monetary policy, somehow causing them to panic, the likelihood of a recession in the US, as well as in the euro area later in the year, has clearly increased. up.”
Wall Street’s overnight losses poured in Asia – Pacific market on Tuesday, with major exchanges largely down and S&P / ASX 200 down more than 3.5% when returning to trading after the holiday. European market changes on Tuesday like Stoxx 600 The index rallied to a 1% gain at the start of trading, before sliding back to a flat line about an hour later.
Defense
In terms of positioning to deal with the current drop, Soc Gen’s Stear suggests that some defensive areas of the corporate credit market could offer some protection for investors.
“My personal view of our position in the bear market is that we are about three-fifths of the way through it in the credit markets, so I’m waiting for another 80 basis points to open. credit wide, meaning the loss was probably not double-digit, but close to, on the stock market before I really started to care about valuation,” he said.
In particular, Stear identified energy and utilities, which he argued represented the necessity of moving towards clean energy and a green transition. However, he remains active in the banking sector.
“I think the banks have averaged so much down in the last 10 years that they’re a lot less sensitive to economic fluctuations, especially in Europe, than they were 10, 15, 20 years ago, because so I think that’s what Stear said.
