Towards the “metaverse of the financial markets” …

The behavior of the financial markets, and therefore investor psychology, remains surprisingly favorable. The rise in US stocks last night is still strong evidence of this.

Based on a limited decline in market interest rates, the Nasdaq was up 2% and the S&P 500 more than 1%. The publication of inflation at 8.5%, and at 6.5% for its version excluding energy and food (“core”), however, is not good news.

Clearly, the “only” 0.3% rise in the “core” index in one month, and a level of 0.1% below consensus expectations, satisfied market participants. This “good news” of the nearness of the inflation peak, and therefore the prospect of a drop in rates (as they have finally progressed slightly) excites investors.

We do not share our general feeling: the market is on the wrong track. Only the strength of considerable inertia after 12 years of interrupted ascent, the inexperience of most professionals, and above all the dominance of algorithmic robots, explain the current behavior of the markets.

The ultimate argument, TINA (“There is no alternative” … but actions) or FOMO (“Fear of losing” … a rally) does not stand up to the deterioration not of risk (or of its perception), but of reality. Because, at the risk of repeating ourselves, and of being considered a bad omen, we would like to recall the reality, and not the risks, of this month of April 2022.

1 / Real sphere:

The price of oil remains very low, despite the announcement of the commercialization of part of the US strategic reserves. This week (reduced), the barrel price recovered nearly 10%. At $ 108 a barrel, with the euro back to less than $ 1.09, the “oil bill” has become a burden on European countries and the planet in general.

The zero Covid strategy carried out in China leads to confinement doubled in a week, which now affects 400 million inhabitants and 40% of GDP. The second quarter promises to be difficult in China: truck traffic indicators are in sharp decline, logistical problems are multiplying and the consequences for Western countries will begin to be felt in the supply chain.

At a geopolitical level it cannot be said that things are improving: Joe Biden accuses Russia of “genocide”, the war in Ukraine is bogged down and Finland is asking to join NATO – which constitutes a major geopolitical event elsewhere. the moment was totally hidden. So, faced with this news, we recently observed some favorable elements: the resilience of the European economy, a less negative than expected ZEW index, or the increase in LVMH’s turnover …

2 / Financial sphere:

Do we need to remind you that inflation has been at its peak for 40 years? Of course, 8.5% in the US and 7.5% in the € Zone are probably peaks of price hikes. Inflation will gradually slow down over the next few months, but will remain at levels between 3 and 4% at the end of the year, a level still very high compared to the standards of the last period.
Furthermore, even temporary inflation is paid for by someone, namely families; 6 months after the peak of inflation, the US economy went into recession.
In the euro zone, 5-year inflation expected in 5 years is now implicitly estimated at the futures price, at 2.4%, above the ECB’s target… Which will soon stop its share buybacks.

The end of quantitative easing measures is the biggest financial event of the year 2022. This end has been registered in the US, not yet in Europe, but it is obvious that the “APP” system must be stopped immediately. Remember that this asset purchase program was launched in 2015 to fight … deflation! So we are in a situation of currency tightening and rising rates as the economy slows …

So, given the maintenance of market prices at such high levels, one of two things: either the prices will correct significantly in the coming weeks, or, without knowing it, we have entered the “financial metaverse”, a totally artificial, digitized and new world. disconnected from reality, built by the American giants of the Web …

Investor Recommendation: We continue to heavily underweight equities for a CAC 40 above 5,982 points.

Trend in the interest rate and currency markets: although yesterday in slight decline, the rates of government bonds remain rigid. They remain above 1.25% for OAT France and around 2.7% in the USA. The € is stable at $ 1.09.

Recent Commodity Trends: The price of oil has risen and is worth more than $ 107 per barrel of Brent.

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