Every week, market veteran and president of Winston Capital Advisors, Fabian Onetti, gives his take on what will impact markets in the weeks ahead.
The market peaked on January 26, a few days later we had the Labor Department’s employment report. For the first time it contained some evidence of wage inflation. With the economy in near full employment and firing on all cylinders, the obvious conclusion was that inflation was finally here to stay, so we better take notice.
The markets went into a vicious correction, clearly helped by some of the excesses of January and the always present esoteric strategies. Very quickly all experts started to adjust their forecasts on rates, inflation and the pace of rate rises of the Federal Reserve. Worries about the equity market valuations showed up everywhere, and not only for the US market but also for markets worldwide. Discounting the prices at 3.25%-3.5% is not the same than at 2.5%-2.75%. When rates are very low, a small movement has big implications for discounting future cash flows.
Emerging markets (EM), as always since they live mostly on borrowed money, took a big plunge, especially those that had a great performance in 2017 like Argentine bonds and equities. Other EMs were not immune.
Everybody went back to the history books and remembered all the corrections caused by rising rates, by Central Banks or otherwise. We were reminded that we have not seen a phenomenon like that for more than a decade; time enough for some young traders to never have experienced that. And how will the young guns handle the volatility?
Later on we had Consumer Price Inflation (CPI) and Producer Price Inflation (PPI) levels grabbed people's attention, and the headline numbers were worse than expected. When the experts dug down they found no evidence of accelerating inflation.
But then Pimco, the largest bond manager in the world, announced that the bond correction had ended. They do not believe inflation will accelerate, the global economy is doing very well and globalization is a deflationary force (everybody sells what they’re best at, therefore have a lot of price flexibility) so they went long on the long bonds.
By the end of the week big Wall Street houses came with opposing views, but one of them also proclaimed the end of the correction in the bonds markets and ditto for the equities after Friday rally.
We are now out of the woods and I would venture that the bond market will enjoy a spring rally.