15.03.2022 – There is still the threat of an intensification of the economic war against Russia. Or the extension of Western sanctions to China. The Corona consequences have not yet been eliminated. Already, a global recession seems as certain as the Amen in the church. Let’s let a perma-bear have his say today.
Credit is cracking
Michael Hartnett, a strategist at Bank of America, recently warned that the corporate bond market is drying up. In other words, companies are getting less and less money in the market. This is a harbinger of a severe recession, which, according to Hartnett, will occur in the second half of the year at the latest. We think: That could mean toppling banks and teetering companies, plus falling corporate profits because people aren’t spending their money for fear of unemployment. This is not a good omen for the Dow Jones, for example, which we see here in the daily chart – it continues to trade below the 50-day moving average.
Previously, Hartnett had already addressed the scenario of a world at war. According to him, the war in Ukraine means a larger inflation shock, a smaller rates shock, and a more severe recession shock. The Federal Reserve and the European Central Bank are hopelessly caught between deflation on Wall Street and inflation on Main Street.
Loud warning signs
Mega-bear Hartnett sees a lot of troubling signs. Such as: Emerging market debt, China credit, China tech, biotech, forex. His antidote: “we are short tech, credit, private equity as era of excess QE over; we are long volatility, high quality, defensives on recession risk; we are long oil, energy, real assets on inflation; dislocation to financial plumbing delays entry to postponed reopening China/Asia/EM credit on (very) distressed yields.”
Of course, equities would not dive south unchecked – any news of a de-escalation in Ukraine would trigger a fierce bear market rally. But that would hardly change the long-term picture.
Goldman Sachs, by the way, recently put the risk of a U.S. recession in the medium term at 35 percent. The investment bank pointed to the high oil prices and the collateral damage from the Ukraine war. Now the story on Wall Street has changed from reflation to stagflation.
Our conclusion: keep an eye on the real-time news. Much, if not all, now depends on the Federal Reserve in the short term. If it postpones rate hikes in light of the various crises, the stock market should cheer. Bernstein Bank is keeping an eye on the situation for you!
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