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Markets rally as the bad news keep rolling in

Three apocalypse cavalry arrived: war in Europe, epidemic in Asia and rising interest rates in the US Market response: shrugged and continued to buy the dangerous things.

Almost unbelievably, European stocks have now fully recovered from the shock of Russia’s invasion of Ukraine. The Stoxx 600 index fell more than 10% from the moment before the invasion in late February to the low point on March 7th. It has now returned to where it started, after the largest weekly rally since the end of 2020. About the same is true of the German DAX index, which has fallen even more strongly and is now close to the starting point again.

This is despite widespread agreement that the EU economy will suffer, perhaps very much, from the war next, mainly because of the impact of painfully high energy prices. Goldman Sachs, for example, has cut its year-on-year growth forecast from close to 4% before the war, to 2.5% now. But it seems that the evolving narrative that the Ukraine war will foster greater cohesion of the EU, and most importantly, heavier government spending on defense, is winning the day.

In Asia, this week brought a rather depressing reminder that Covid-19 is not over. On Monday, Chinese stocks in Hong Kong Was their worst day Since the global financial crisis, with a drop of more than 7 percent after authorities announced a six-day closure in Shenzhen to deal with another outbreak of the corona virus.

Analysts at ANZ calculated that a one-week shutdown in the region could bring down to 0.8 percentage points of annual growth. It is clear that the way back to well-functioning global supply chains will not be smooth.

Making the situation worse, investors fear that at some point soon, China will have to choose a side more clearly in the conflict in Ukraine. “There is a fear that China will somehow get entangled in sanctions,” said Ron Temple, head of the U.S. stock division and co-head of multi-asset management at Lazard Asset Management.

However, once again, fast forward to the weekend and China’s stock markets return to action after Liu H, the Chinese president’s closest economic adviser, Promised measures To boost the economy, along with “undefined policies that benefit the market.” Details were not provided immediately, but it does not matter – investors can identify a large amount of financial or fiscal incentives in excess of 50 steps.

And of course, the US Federal Reserve has finally done it. It Raise the interest rate For the first time since 2018, with a quarter-point increase expected to be just the first of several during the current year.

The terrible end of monetary incentives depends on more risky assets for months. However, in the end, the S&P 500 rose more than 2% on Fed day and just kept going away.

The Nasdaq Composite, stuffed exactly with the high-tech stocks considered the most vulnerable to tighter monetary policy, has had its best week in a year. Sure, it has fallen nearly 13 percent so far in 2022, and the Goldman Sachs non-profit technology stock index is still down around 60 percent this year. But a 6.5% rise in the Nasdaq within a week is no sniff.

“I still think some of the speculative technology stocks in the U.S. are overvalued,” says Lazard’s Temple. “But there is still a strong claim for U.S. stocks.

The game has changed; Following higher metrics and calling yourself a genius is a worn-out trick. Investors have “overdosed” on sticking to broad market indices in recent years, says Michael Kelly, head of global asset-building at PineBridge Investments.

If you put blatant interest rate hikes to one side, the Fed’s process of cutting the $ 9 million balance sheet it recorded to provide incentives to the financial system will be difficult for investors to navigate, he notes. “It’s very difficult for markets to manage it up front,” he says. “I do not believe in a ‘priced’ story. I do not believe it can be priced.” Utilizing niches instead of tracking the herd would be important from here, he says.

However, it is clear that investors are determined to choose the positive things. In a note this week, Credit Suisse’s investment committee said that following an ad hoc meeting, it had decided to move to an overweight position in equities.

The favorable response to the Fed’s rise in interest rates suggests that “markets have had enough time to digest the changing economic outlook,” it said. “Buds of hope” on the ceasefire in Ukraine have appeared, he added. And a decline in commodity prices suggests that the Russian shock may “allow the global economy, including Europe, to remain on a solid growth path.”

Analysts at UBS Global Wealth Management said the rise in U.S. stocks since the Fed meeting shows “how quickly markets can change in investors’ perceptions of geopolitical risks.”

“It also reinforces our view that simply selling risky assets is not the best response to the war in Ukraine,” they said.

In short: markets are about adapting fears to reality, and everything could have been worse. We must hope that it does not tempt fate.

katie.martin@ft.com

Markets rally as the bad news keep rolling in Source link Markets rally as the bad news keep rolling in

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