The award for the worst FED chairman goes to…
18 March 2022
A great trading opportunity could arise
24 March 2022
I start this article by showing you a chart. Below, you can see a comparison between the S&P 500 (in black) and crude oil (in red).
The (weekly) chart shows how well the two futures are correlated. At first, it may seem surprising that stocks tend to move like the price of oil. Indeed, it is customary to think that a drop in oil prices is good news for the economy, at least for oil importers.
In fact, one explanation for the tendency of stocks and oil prices to move together is that they are both reacting to a common factor, namely a strengthening/weakening of global aggregate demand, which benefits/damages both corporate profits and oil demand.
It is not the only one, there may be other explanations for this phenomenon, such as greater general uncertainty and therefore less aversion to risk (leading to a fall in stocks and oil). Or that a rise in oil prices, even if initially caused by a lower supply, affects global financial conditions by facilitating the creditworthiness of oil-producing companies or countries.
All this introduction to get to the subject of this article. I show you another graph below.
The graph shows how every 50% rise in crude oil then led to a recession. Reason? Not because rising oil prices are too much to bear, but because central banks respond to galloping inflation by raising rates.
The United States, the FOMC, raised rates by 25bps at its last meeting and plans 6 more hikes (also by 25 bps) during 2022. I have already explained in my article "The award for the worst FED chairman goes to…" why repeated rate hikes will be useless in fighting inflation and will only lead to a substantial collapse in US economic growth.
This is not only my opinion but also that of the market, with the Dollar Index ending the week down 0.94%.
We will have a test on Wednesday when the UK inflation data comes out and the Bank of England has already raised interest rates twice.
I conclude by crossing my fingers. In the last few days, some hope is leaking out about the possibility of reaching an agreement on ending the war in Ukraine. There is more optimism in the air. If this happens, it would lead to an easing of pressure on commodity prices and not only that, some currencies that have been penalised by investors with the war would also benefit.
In a simple and concise way, I explain why we should prepare for a recession. It is very likely, in fact, that this will be the result of the repeated increases in interest rates by central banks
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
