Market optimism is fading as the energy crisis deepens and the shadow of inflation grows bigger and bigger. But the two major Wall Street investment banks have positioned themselves against market sentiment and in line with central banks. Inflation is a transitory phenomenon, they say, and they advise their customers to keep buying with the drops.
Everything revolves around inflation. The energy crisis, the recovery and the tapering of the central banks are conditioned by the rise in prices. And all investors’ fears are focused on the same word: stagflation. The explosive low-growth cocktail with skyrocketing inflation, a horror scenario for central banks and exchanges. This narrative is beginning to sink in, as energy prices continue to rise, along with inflation data.
A Deutsche Bank poll suggests there is a “pretty strong consensus” that some kind of stagflation is more likely. And it will be picked up by the market with further drops of 5%. However, one of JP Morgan’s star analysts, Mislav Matejka, the European stock exchange chief, is optimistic about the market for the remainder of the year.
According to a note to clients, he comments that stocks will experience significant internal rotation at the end of the year, driven by a rebound in bond yields, and at the end of the flattening of the curve. The expert is confident in a market in reflation, like the one that drove last year’s rally, with growth accompanying inflation.
Matejka says stagflation fears will begin to fade, and with them market weakness. The analyst recommends buying in the fall before a clear horizon for the next few months. Concerns about China will recede, the headwind will blow with the pandemic, there will probably be higher fiscal spending, the labor market will remain strong and investors will feel comfortable with the Fed’s tapering. With this scenario, Matejka sees greater travel in value stocks and in cyclical sectors versus stock indices.
Matejka is not alone. “Despite near-term uncertainty, we expect the equity market to continue to rally as investors gain confidence that the current pace of inflation is transitory,” David J. Kostin, Chief Strategy Officer at Goldman Sachs, also writes today. . The blow in Europe has gone more unnoticed but the new lash in bond yields has led the S&P 500 to a 5% correction from highs. “We believe that this fall will be a good buying opportunity, as the 5% setbacks have done in the past,” they assure from Goldman.
“Below normal temperatures could exacerbate the supply situation and push prices even higher”
The thesis of both investment banks go through a truce in the prices that gas, oil, coal and electricity are reaching. “The brutal rise in prices is an example of the relentless dynamics that sometimes rage in commodity markets.
The strong rebound in growth challenges complex and slow energy supply chains, which means that tensions can appear faster and last longer, “explains Yves Bonzon, CIO of the Swiss private bank Julius Baer. And he adds that “this fierce market dynamics seem to be characteristic of the usual bubbling that forms around cycle peaks. Prices should cool down by the end of this year as the market’s self-healing mechanisms have been activated.”
The danger that prices will continue to rise during the winter translate into a risk for the economy. The perception of higher inflation implies a lower consumption rate and also a lower rate of investment by companies. In the best of cases, there is an increase in production costs, which ends up affecting margins.
In some sectors, it practically means closing production. Bank of America experts are not overly optimistic that prices will start to slow down anytime soon. “Extreme volatility could continue especially in early winter as below-normal temperatures could exacerbate the supply situation and push prices even higher,” they say. They expect us to see a normalization until mid-2022.