- We continue to closely track the action in US Treasuries, and corporate high-grade and high-yield markets as good reference points on markets adequately pricing for risks, including the sharply increasing probability of a recession.
- Our hunch is that the only way the US Federal Reserve Board can achieve its “goals” on price equilibrium is by using “demand destruction”.
- Experience suggests we should expect markets to remain extremely volatile until the Fed signals that they are close to being “done” and are comfortable with the reset on trending inflation data.
- Accept the risk-on/risk-off schizophrenia in markets. The markets will remain “noisy” and volatile as investors internalise flows/valuations “adjusting” to lower growth/ margin assumptions and higher riskfree rates, leveraged positions being unwound, further supply chain dislocations, intermittent optimism over China “easing” counter-cyclically and “reopening” and Putin’s intentions for Ukraine and Europe.
- Although we are six months into the correction, we are not yet in capitulation mode. We still see far too much machismo in pundits “calling a bottom” and trying to “trade the rallies”.
- We should certainly be expecting more Target-type “resets” to “right-size” post-pandemic business models, balance sheets and inventories, even as persistent inflation, rising mortgage rates, and a slowing economy start to erode consumer confidence and purchasing power.
The Tantallon India Fund closed 3.35% lower in May, recovering off the mid-month lows as global risk appetite slumped on concerns of elevated energy prices and persistent inflation likely forcing global central banks to continue to rein in monetary policy, even as the risks mount of a synchronised global slowdown.
In reflecting on the market action over the past several weeks, we would offer up the following thoughts:
