2022 06 2nd Week — Macro View : Market drop on the back of inflation. What priced in the market now ?
Looking into movement of USD from fundamental perspective.
Int the past 1 week (6–12'May), most of the time equity market relatively flat rebound from mid may. From FOMC official or economic release so far hasn’t any worsening condition but at the same time there’s no improvement especially on price index.
This is inline with market complency which i mentioned in my last article. From asset pricing perspective, market hasn’t pricing-in significant earnings slowdown which will affect both on valuation and earnings estimates. Kindly check my last week article.
Looking into Past USD Appreciation against fundamental metrics.
This week article, i would argue not only equities and credit market that hasn’t re-pricing from risk perspective. In my opinion, recent strong USD hasn’t priced enough uncertainty on other regional.
In general, Analyst could justify positioning USD based on several fundamental metrics :
- Growth differential : indirect proxy of demand currency
- Interest differential : proxy of cost of fund from bank perspective
- Deficit differential : direct proxy of supply currency
To put things simple, i would only look into major counterpart of USD like European Union (EUR) :
- Interest differential
- Growth differential
- Deficit differential
What’s the lesson from EUR Case
Based on my observation on EUR and few of my other observation on other major currency. Market seems to :
1. Market seems to move/swing significantly on recent market data while not incorporating consensus on forecast data.
2. Currency seems to affected on very short-term interest rate on its pricing. Therefore, as long as FOMC hadn’t guide for lesser hike rate. current trend for USD counterpart seems to be weak.
Therefore, it seems market very heavy on recent data due high uncertainty on forecast number. Yet, if we adjust USD using REER. The USD valuation seems nearing its high.
If we look from the other perspective of market cycle. This might be as interlude of market bottom. This also reflected on CFTC US Dollar Non-Commercial Combined Position (Speculative position both on futures and options)
That’s all for this week macro takeaways. While market seems still crashing, i believe just asset classes should be recovered quite fast understanding investor seems to heavey on USD, just like rebound on SPX from 20-May to 7-June despite no significant improvement. If CPI prices on MoM already show significant improvement, i could see significant jump on market.
Thanks for reading, I hope you found this article useful. Always DYOR (do your own research) because conviction always come through understanding not just following.
Disclaimer
This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by me or any third-party service provider to buy or sell any securities or other financial instruments.
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This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by me or any third-party service provider to buy or sell any securities or other financial instruments.
