Bearish analysts are out in force.
Bob Janjuah of RBS, in an email on Tuesday, warns of a global stock and credit crash in the next few months; with the S&P 500 likely to lose up to a quarter of its value. In credit, Janjuah sees the iTraxx soaring to 130/150 and the iTraxx Crossover to 650/700.
This call looks for S&P down at 1050 +/- 50 points during this 3 mth window, and whilst credit will be relatively outperform stks, I still sell XO at 650/700 during this period, HiVol up at 275/300, Main up in the 130s, and IG10 at close to 200. Whilst I think August and September are the key risky months, the reason I’d be small shrt (now) over late June and July, when I suspect risk assets will try to rally, is that the risk is that the coming big sell off actually starts EARLIER rather than later.
The Telegraph picks up on earlier Janjuah comments:
I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names. Cash is the key safe haven. This is about not losing your money, and not losing your job.
Wall Street should rally through early July before succumbing to the twin pressures of high oil and high inflation - the first painful spasms of a recession. The RBS team also point specifically to the limited range of options open to central banks.
The point is taken up by analysts at Morgan Stanley. A note from last week - “1992 redux” - by the bank’s European banking team - warns of potential for a “catastrophic event” on the horizon to match the European monetary crisis of the early nineties.
We find striking similarities between the transatlantic macro tensions that built up in the early 1990s and those that are accumulating again today. In both cases, monetary authorities took opposite options on both sides of the Atlantic: stabilising output in the US, and stabilising prices in Europe. Macro tensions caused a major currency crisis in Europe in 1992. Will history repeat itself?
For Europe though, say MS, this time the outlook is more stable:
In short, we think that, within the monetary union, tensions will dissipate through corrections in real demand and relative asset price adjustments, negative for countries running large current account deficits (Spain, Greece) and possibly positive for those running surpluses (Germany, the Netherlands, Finland). Within asset classes, we think that property prices are more likely to bear the brunt of the adjustment than other asset classes.
The grimmest portents come for peripheral Euroland economies: eastern Europe especially, thanks to all those states with high current account deficits.
The UK’s darkening monetary situation, meanwhile, is the subject of an article in today’s Telegraph:
Britain’s lonely band of monetarists fear that the Bank of England will trigger a severe crunch if it overreacts to the inflation spike and keeps interest rates too high as the downturn gathers pace.
The M4 monetary supply in particular, is plummeting. The headline number - a growth rate of 11.1 per cent - masks a precipitous decline when crisis-driven interbank market factors are stripped out. The M4 growth rate is down year-on-year 16 per cent according to the BoE. That contraction in lending could have a huge impact on the economy - and makes inflationary-killing rate hikes less of a sure path to take for the Old Lady.
Merv is aware of as much - as he made clear in his letter to Darling yesterday:
The Committee believes that, if Bank Rate were set to bring inflation back to the target within the next twelve months, the result would be unnecessary volatility in output and employment. So the MPC is aiming to return inflation to the 2% target within its normal forecast horizon of around two years, when the present sharp rises in energy and food prices will have dropped out of the CPI inflation rate.
Rate rises then, are off the cards for now.
