Christopher Wood, Greed & Fear - Jefferies

Mumbai: Christopher Woods of Jefferies in the weekly newsletter says it has been extraordinary times in world financial markets as the correlation between bonds and equities on the downside has seen further renewed momentum during the past week which is also exactly the kind of market action to be expected in an environment of rising stagflation concerns. Talking on the US dollar he adds those concerns as it appears to be in the midst of one last final parabolic spike. The US Dollar Index surged by 5% Wok over Week to an intraday high of 114.8 on Wednesday, the highest level since May 2002. He says as the more the dollar rises the more it creates incentives to make long term arrangements to pay for commodities in currencies other than US dollars, as is already happening.

For S&P 500 Chris Wood adds meanwhile the S&P500 has now broken below its June low, the S&P500 fell to an intraday low of 3,623 on Tuesday, compared with the June low of 3,637. Talk on the US Strategy he says 'Does this mean that US equities should be bought? A short-term rally off this level would not surprise. But, in GREED & fear’s view, US equities are, sooner or later, likely to break below the June low decisively for the simple reason that US earnings have barely been downgraded yet and the base case is that the US is heading for recession. In this respect, the lesson of history is that earnings fall significantly during recessions and also it should be remembered that 40% of S&P500 revenues derive from offshore so it is not just the rest of the world which is hurt by a stronger dollar.

Chris Wood, talking about the 'Recession talk', says recession talks will invite hopes of a Federal Reserve pivot at a time when the American central bank is still in the process of trying to regain its inflation fighting credibility. Still, it will take time for the labour market to weaken which is why the best hope of a quicker than expected Fed change of language is a major financial accident in terms of bodies surfacing, and the risk of that is rising by the day and meanwhile markets have been reminded this week of how quickly central banks can change direction when the pressure comes on.