The publication of U.S. inflation data can boost the demand for risks
The most feared in the life is the lack of fear. Euphoria is a good thing, but it causes increased risks, bubbles in the asset markets, and, finally, financial and economic crises. In this respect, the current correction of the global stock indexes is of great use. The turbulence seems to be necessary. It is a pity it hadn't occurred earlier.
S&P500 rollback from all-time highs is the first sign of the U.S. economic cycle completion. According to BofA Merrill Lynch poll of asset managers, 70% of the respondents are sure that the global economy is at the end of the cycle, that is in the state, preceding the recession. The index has reached the highest level since January, 2008. Should we panic? I don’t think so. Large players expect good times to continue for a long time, and 91% of them don’t think the recession to start soon. Nevertheless, they recommend abandoning risky assets gradually and increasing the proportion of cash in investment portfolios
Change in investment portfolios
Source: Financial Times.
It is obvious that the turbulence resulted from the monetary normalization by the leading world central banks. Even if Jerome Powell and his colleagues are trying to convince investors that the Fed's policy remains unchanged, that the current correction of stock indexes won’t make the regulator change it, we all perfectly understand that it is a two-way relationship. Just as the rumours about the Fed monetary restriction triggered S&P500 rollback, so its development can well make the central bank slow down. In this respect, the equity market is unlikely to dive too deeply. Another matter is that the markets become highly volatile in the situation when they have returned to a norm.
Dynamics of Forex volatility
Carry traders are now actively addressing the funding currencies, and that results in the yen surge up to 15-year high against the U.S. dollar. But waht is far more importan, it is the return of the sense of boundaries. In the situation of cheap liquidity from the central banks, associated with historically low volatility, equities (risky assets) could grow simultaneously with bonds (safe assets). Under normal conditions, the global risk appetite indicates the demand for financial instrument of a certain class. Euphoria is leaving. Fear is coming back. And that is good.
Considering the fact that the mass sales in the U.S. stock market were triggered by the release of the report on average wages, a leading indicator for inflation, we can suggest that the publication of CPI statistics for January is likely result in either the trend restoration or the correction development for S&P500. Modest projections of consumer prices (+1.9% against +2.1%) and core inflation (+1.7% against +1.8% Y-o-Y) suggest that in case they come true, income generating currencies (AUD, NZD) will go up in price. On the contrary, CPI growth will let the Fear prove itself and return the interest in selling EUR/USD for some time (I don’t think it will be long).
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