It's been a while since my last blog post in November. It feels like the world has been turned upside down ever since. Nevertheless, I will try to assess what is happening in the world at the beginning of July 2022.
Last year the main and most relevant topic obviously was Covid-19. The spread of Covid has eased and restrictions have either been lifted or minimized almost everywhere. However, Covid has not really disappeared, and many people are still infected with some type of Covid variant every day.
Of course, there are countries that still look at Covid more cautiously – like China which still applies a "zero Covid policy" with rather drastic restrictions in an attempt to prevent any community spread of the coronavirus. To achieve this goal, the country has enacted some draconian measures, implementing a strategy of using strict, targeted lockdowns and mass testing. Entire neighborhoods have been sealed off across the country. And this greatly affects not only one of the largest economies in the world but global supply chains as well.
Logistical bottlenecks are also still not resolved. Look at the global container index FBX which is the leading international index demonstrating market rates for sea containers.
As you can see, improvements are taking place, but at an insufficient speed. The "logistics bottleneck" is still rather big and solutions take time. Besides, China's "zero Covid policy" and the current war in Ukraine certainly do not improve this situation in any way. Therefore, the logistics problem is still relevant, with all the resulting consequences.
If we look at the war as such - Russia's decision cannot be understood by any person with common sense. Russia's reasoning is beyond every possible criticism. Of course, this war has a negative impact on the global economy and politics, making some biggest global shifts since World War II.
I do not want to discuss political issues of war or any other issues that do not affect financial instruments in my blog. This blog is about trading, not politics. So, the impact of war on commodity prices is strong. Look at the Thomson Reuters Commodity Index for example:
Since the beginning of the Covid pandemic and the beginning of the war - the price of commodities has increased by more than 150%. And keep in mind that Ukraine is a large exporter of key crops: sunflower oil, maize, barley, and wheat.
It is obvious that Ukraine won't be able to provide the previous amounts of grain - thus sensibly assuming that some sort of global food crisis might occur. However, when you look at the wheat prices, they have calmed down and have come back to pre-war price levels.
I can't really explain the reason why - just simply acknowledging the fact here.
In reality, a price correction is visible in the commodities. The question is - how deep will it be? Perhaps the prices have already peaked or the slack in prices point to falling demand and an impending recession? Copper prices have also dropped by nearly 30% This is rather significant since copper is widely used in production, energy, and households and is often considered an economic indicator. In reality, a price correction is visible in the commodities. The question is - how deep will it be? Perhaps the prices have already peaked or the slack in prices point to falling demand and an impending recession? Copper prices have also dropped by nearly 30% This is rather significant since copper is widely used in production, energy, and households and is often considered an economic indicator. Could it be that copper is the one who points out the cooling off of the economy? After all - how long will the economy be able to withstand such tension of inflation and geopolitics? Interestingly that industrial metals experience a price drop, while the energy sector experiences an increase. This is certainly a divergence since these two indicators go hand in hand. So, I wonder if this price decrease of industrial metals really indicates a cooling-off economy?
Fuel prices have risen to their highest levels in recent years. Oil prices have not been so high since 2013. The price increase in the energy sector directly affects the economy. Inflation hits new records as well.
The war and the energy prices greatly affect the European Union, especially those countries that have been directly dependent on Russia's energy supplies. Unfortunately, there is no quick or easy solution how to deal with this.
Therefore, it can be said that war has the most direct impact on the economy. Especially if we also take into account the fact that Ukraine has a developed agricultural sector. So, this war has had a huge impact on the global economy and food prices.
If we look at the classic indicators, like the manufacturing index, we see a slight drop of -3.1%, compared to the previous month (according to the July 1 report). Nothing significant unless you know that it is the worst indicator of the last 12 months period.
In the manufacturing report, I usually pay attention to the "new orders" section. It is an important sub-section that has been growing steadily in the past and also indicated growth in the future. The latest report shows that the "new orders" are experiencing a decrease of 6%! This is a cause for concern as previously this section had been growing for 24 consecutive months. Overall out of 18 manufacturing sectors, only 8 reported an increase in orders in June.
New export orders also experienced a decrease of 2.2%. So far, export orders have grown for 24 consecutive months. The strict restrictions on Covid in China have a negative impact on the Chinese economy and the war in Ukraine has a negative impact on the situation in Europe. Hence the reduction in this section as well. The growing sectors here were only - food, beverages, tobacco products, computers, and electronic components.
The service sector report, however, shows an increase. Although "new orders" and "export orders" show slight declines (-2% and -3.4%), the overall figures for new orders are still rather good: 55.6 and 57.5, respectively. So, the service sector looks strong, and all sectors reviewed have shown growth.
Let’s look at the next leading indicator – consumer sentiment. This looks even more alarming. There are huge drops in all sections of the survey and the overall mood has reached the lowest indicators since 2008.
Consumer sentiment is accurately described by the word "recession" in "google trends".
The recession has been a hot topic in 2008-2009, during the Covid crisis, and now…. What can be said - this graph says all.
Speaking of recession. Let’s have a look at the ratio of 10-year and 2-year government bonds. The 10-2 Treasury Yield Spread is the difference between the 10-year treasury rate and the 2-year treasury rate. A 10-2 treasury spread that approaches 0 signifies a "flattening" yield curve. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period. Every time this ratio reaches zero or becomes negative, a recession follows. We can clearly see this in the graph. The recession periods are highlighted with gray vertical columns.
Looking at all of the above, it looks like a recession. And as I have already written before – the economy is directly correlated with the stock market. 70% of the time when the economy grows, the stock market grows, and vice versa - when the economy falls, the stock market also falls.
And you most likely have seen this already in the stock market: The S&P500 is already down by 24%.
Purely statistically - the average drop during recessions is -36% (data starting from 1965). On average, the "Bear Market" has been going for 14.5 months, and the market has taken 2 years to recover from the recession. Even though we are experiencing a different set of problems than in the past, I think that in general everything is as usual, and the market is already pricing in a recession.
Let's have a look at the crypto market. There have been countless upheavals there. From the death of the UST stablecoin to the death of Celsius, the decentralized lending platform. Such things ought to be considered in the crypto world. Simply because this is a new, little regulated, and very aggressive environment. Many projects are very dubious and contain nothing but beautiful marketing, similarly like there was an ICO bubble in the previous cycle.
Additionally, the participants of this market are too fond of leverage. Thus, when the market falls, many aren't able to withstand it - they close their positions with losses and the whole house of crypto cards collapses. As I have written before, this is normal for this segment. After a huge rise, experience a drop of 80% or even more.
Looking only at BTC - nothing has changed. Bitcoin is not bankrupt, broken, lost, or otherwise destroyed. Everything is fine here, and everything continues to work.
What is worth noting is that Bitcoin has started to correlate with the Nasdaq index in this cycle. In other words, BTC is viewed by market participants as a technology company. This correlation can be seen graphically very well:
As we can see, BTC price and Nasdaq price move very similarly.
If there is already such a correlation, then BTC should be looked at as a tech company. Typically these companies experience very good growth when the economy is growing. During a recession, everything is exactly the opposite, though. The only thing - we don't know how long this recession period will be...
Summing up all the above-mentioned parameters - we are expecting a recession. How long, how deep - we don't know. But one thing I know for sure. If you keep your finger on the pulse and follow all the data, you won't miss out on the best profit opportunities that come along.
What you should definitely avoid - DON'T just blindly "BTFD"s (Buy the Fucking Dip). Because we don't know where the "bottom" will be. It is necessary to understand the data and technically find the right moment to make purchases. Now is the right time to invest in education. Read books, learn and invest in yourself. So you become stronger when the next cycle comes. Learn and earn!