To The Moon

In last Monday's article , it was reported that the $SPDR S&P 500 ETF Trust(SPY)$ lost 1.9% over the course of the preceding week. After corrections, this number now stands at negative 2.21%. And by no means was this type of winding down limited to the U.S. equities. A similar picture is emerging from the European Union and Eurozone Economic Area's powerhouse - Germany. 

When comparing the benchmark DAX Performance Index (GDAXI) versus the S&P 500 (SPX), there is a general trend of correlation seen in the Western Hemisphere's two major economies:

Over the course of the past week, it seems that, when not accounting for corrections at the moment, both benchmarks are up. This is, however, a false positive, as the daily price trajectory indicates:

While the S&P 500 was largely flat, the DAX was trending downwards throughout the week - until the last trading two days when both benchmarks rose. As discussed in the article published at the end  of last month and confirmed in the following week, this was due to oversold positions being covered. In the case of the DAX, this led to a "mini rally", which some media outlets rather hasily attributed to a turnaround. 

This is not true; over the course of the week, Germany officially no longer has any company in the Top 100 companies by market cap. The country's most valuable company $SAP SE(SAP)$ now ranks No. 112.

There are a number of reasons for this: firstly, the post-pandemic recovery has seen Germany lagging behind other top Eurozone economies. Secondly, the fall of the Euro versus the US$ has impacted valuations, Thirdly, Germany's balance of trade is precarious even within the Eurozone and finally, inflation is sky-high in the Eurozone. 

Over the course of the year, expectations on 10-Year inflation in Germany have rapidly increased:

Another problem for the German economy is the availability of electricity. After closing down its nuclear plants and mothballing its coal-fired plants, successive German administrations bet heavily on renewable energy - which doesn't neatly meet all of the country's needs. The only alternative was increasing dependence on gas-fired plants across the Eurozone as well as Ukraine while gas was piped in from Russia. 

After a series of measures adopted by the European Union against the Russian Federation due to the Ukraine conflict and retaliatory measures (both actual and threatened) from the latter in recent months, electricity prices for 2023 delivery, i.e. the year that NATO intelligence estimates as seeing the war in Ukraine ending one way or the other, have skyrocketed in most parts of Europe:

The predominant reason for this is the U.S.-European measures enacted to limit revenue flow to Russian energy companies for energy exports. The natural countermeasure from the Russian side would be to limit energy flows to these countries. Starting today, Gazprom's Nord Stream 1 pipeline into the Eurozone is being shut down for 10 days for maintenance. There are expectations that the Russian government might either prolong the shutdown or limit the gas flow after this period. 

With regard to gas imports, European countries have two key problems: firstly, there aren't nearly enough sites open for natural gas extraction within their sphere. Secondly, given the pipeline from Russia, there aren't nearly enough terminals for receiving imported gas from outside of Russia. As a result, the spread between gas priced in Europe and gas priced in the U.S. (which has a number of sites within its territory) is growing steadily wider: 

Unsurprisingly, Germany's economy minister Mr. Robert Habeck warned that the country faces a Lehman Brothers-style collapse in the next year. Rationing of energy in Germany have already begun. 

Speaking of the U.S., there is an interesting trend in U.S. equity markets: volatility is vanishing:

This is bad news for investors holding U.S equities; over the last 8-10 years, large traded volumes lent to volatility which, in turn, led to high intraday spreads and a general exuberance in equity prices. This is now gone, thus leading a steady decline in stock prices. 

As last week's article indicated, its likely that the recession part of the inflation/recessionary cycle has begun.This has had a number of effects. For instance, as per data from realtor.com, the number of U.S. homeowners reducing the asking price for their properties has doubled year-on-year:

Note: Data Compiled By Bespoke Investment Group

Also, there is an interesting effect on commodities due to the fading growth outlook: the Bloomberg Commodity Index - which tracks energy, grains, industrial metals, precious metals, softs (coffee, sugar and cotton) and livestock - has been falling while showing a steady uptrend:

On the question of foodgrains, spot contracts for U.S. wheat, corn and soy have also been plummeting:

Now, the interesting aspect is that these are spot prices for the spring season's harvest. In the U.S., winter wheat production, i.e. crops planted in the fall season, represents approximately 70% of total U.S. production The U.S. Department of Agriculture has already indicated that only 30% of total wheat planted can be expected to be in good health - with estimates varying by a couple of percentage points here and there. Also, unsurprisingly, a large portion of the wheat supply for Europe and Middle East comes from... yes, Ukraine and Russia.

Given rising inflation (both current and prospective), economists' consensus on GDP/economic growth in 2023 for both U.S. and Europe have dramatically changed over the past one month:

There are two points to note here. First, forward-looking estimates for major Western economies typically tend to be more optimistic than what is measured after the fact. Second, July's consensus estimates aren't out yet but it's an even bet that the estimates will continue to carry on with recent trends. 

Unsuprisingly, India - the world's second-largest grains producer - has banned all wheat export arrangements until the foreseeable future. In the face of rising inflation, it can be expected that most major food producing/exporting nations will enact similar bans to contain inflationary pressures on their people. 

For a microcosmic example, lets consider this: Singaporean readers are likely aware that Malaysia had initially enacted a ban on chicken exports on June 1. A fortnight later, the Malaysian government eased the ban to allow for quantities of kampung and black chicken to be exported to Singapore but commercial broiler chicken - which is the source for the majority of chicken meat consumed practically anywhere - remains largely banned. In terms of food security, Singapore is heavily dependent on imports from Malaysia

Source: Straits Times

If the going gets tough in the year to come, this dependence will turn quite costly for the average Singaporean. There are indications that a larger and more variegated scenario is poised to play out in Winter on food importing nations. 

In Conclusion

The facts presented drive home the points made in the past two Mondays: on a global basis (with the U.S. and the Eurozone in the very center of it all), it should be clear that the scale is steadily tilting towards the second phase of the inflationary/recessionary cycle. While little can be done about chicken rice beyond a "wait and see" approach, there are alternatives for capitalizing on broad markets in tactical terms. For example, Exchange-Traded Products (ETPs) such as $LS -3X SHORT SPY ETP(SPYS.UK)$ and $LS -3X SHORT GERMANY 40 ETP(DAXS.UK)$ are available to make a daily-leveraged -3X bet on the downside for short-term tactical trading on the Tiger Brokers platform. Similar products for high-conviction tech stocks, clean energy stocks, semiconductors, etc. are also available.

Simply going long or going short on a stock aren't the only tools available for Asian investors. The differentiators between a win and a loss in the markets are pragmatism and discipline.