Global stock markets can retest June 2022 lows, cautions Chris Wood

Most global markets have staged a smart recovery since their June 2022 lows. The S&P BSE Sensex has outperformed its peers with a rise of around 13 per cent since then

The markets may have overplayed a hand when it comes to believing that the worst of inflation is over and can retest their June 2022 lows, cautioned Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

The US CPI report, Wood said, remains by far the most important monthly data point globally. The data released earlier this week (on Tuesday) meant that the peaking-out-of-inflation narrative, which drove markets over the summer, is, for now at least, in full-scale retreat.

“The situation remains the inverse of Goldilocks with the recession risks growing every time the Fed tightens. Jefferies expects the recession to begin in the third quarter of 2023 (Q3-23) and last five quarters. This is why with the S&P500 remaining 8.5 per cent above the June low of 3,637 and quanto tightening getting under way, GREED & fear would remain extremely surprised if there is not a re-test of that low,” Wood wrote.

Most global markets have staged a smart recovery since their June 2022 lows. The S&P BSE Sensex has outperformed its peers with a rise of around 13 per cent, as compared to NASDAQ (up 6 per cent),Nikkei 225 and CAC 40 (around 5 per cent each), and the S&P 500 (4 per cent), data shows.

Meanwhile, the US’ headline CPI inflation slowed from 8.5 per cent YoY in July to 8.3 per cent YoY in August, above consensus expectations of 8.1 per cent YoY, while core CPI inflation rose from 5.9 per cent YoY in July to 6.3 per cent YoY in August, data showed.

 

“The money markets now expect another 200 basis point (bp) Fed rate hikes to 4.25-4.5 per cent by March 2023 while Jefferies’ US chief economist Aneta Markowska now expects another 200bp of tightening this year, up from 125bp previously expected,” Wood said.

The latest US CPI print has seen global brokerages such as Goldman Sachs sound caution on the pullback rally seen since June 2022, who believe that the global stock markets have not seen a trough yet and are still in a bear phase. The three key reasons why a genuine bear market trough has not yet been reached, according to their analysts, are their belief that inflation and interest rates still have more room to rise, economic growth is likely to weaken, and valuations and positioning are not at extremes.

Those at Morgan Stanley, too, echo a similar view and expect the US Federal Reserve to announce a 100 bps hike in key rates later this month. As a result, they expect the markets to move towards their bear-case scenarios over the next few months.

“The US CPI print was a clear upside surprise versus consensus both for headline and core inflation. Fed Fund Futures now discount at least a 75 bps hike at the next FOMC meeting on September 20-21 and a non-negligible chance of a 100 bps hike. We think the chances of a sudden downside dislocation are also rising. Expect near-term further declines away from our June 2023 base case targets and towards our bear case targets, particularly for MSCI EM (9 per cent downside), Hang Seng (12 per cent downside) and MSCI China (15 per cent downside),” wrote Jonathan F Garner, Morgan Stanley's chief Asia and emerging market strategist in a recent coauthored note.