Global yields surge, markets under pressure!

00:00:00: Hi and welcome to Swisscodes, daily market talk.

00:00:03: It's Monday, May the eighteenth of May.

00:00:05: global yields are soaring as rising inflation due to higher oil prices forced investors rethink outlook for central bank policies while European Central Bank expectations were already pointing at the possibility summer rate hikes.

00:00:19: The fund's futures have now started pricing a more than fifty percent chance in the US which is a stunning reversal from expectations for multiple cuts earlier this year.

00:00:32: With equity valuation stretched and borrowing costs rising fast, market correction now looks inevitable!

00:00:39: So we will talk about that AND more.

00:00:41: but before we do as always please keep in mind opinions are my own & not financial advice.

00:00:57: So, the big story and dominant market drivers since last Friday has become the rapid sell-off across sovereign bond markets as bond yields in major markets including the US & Japan soared last week on a set of inflation numbers there showing that inflation accelerated faster than expected by analysts and that was obviously due to the Middle East led energy price pressures.

00:01:21: Now, yes it was predictable!

00:01:23: And the funny thing is there's always a pivotal moment in the market that provides aha moments for investors.

00:01:30: last week that aha moment came with inflation numbers from major economies again including US and Japan while oil prices also kept rising because of no progress whatsoever.

00:01:44: the straight of homeless remains just closed.

00:01:48: And while this Monday, the bottom stress remains on their headlines as U.S.

00:01:51: created past a one hundred and eight dollar per barrel level Earlier in the session, and it's consolidating just below this level at a time I'm talking here with upside risk upwaiting as the prolonged Middle East conflict leads to record decline in global oil reserves.

00:02:08: As such The Japanese Ten-Year Yield hit the two point eighty percent level earlier this morning before bouncing lower as Nick Haysall off another one percent following last Friday's sharp two percent retreat also dragging major US & European indices down with stocks that have been performing quite well since weeks took a hit simply because they had been carrying the latest rally on their shoulders.

00:02:32: In China, the latest economic data looked particularly bleak with an unexpected fall in investment An unexpected deceleration in industrial production and a worrying decline in retail sales growth to almost none, In the month of April mostly due to a fifteen percent plunge in car sales.

00:02:50: The weakness was most explained by heavy disruptions due to the Iran War.

00:02:55: whether we are talking about supply chains or energy transport Last week's US-China summit led to certain number of trade deals that sounded kind of positive especially agricultural goods while China has reportedly refused by NVIDIA's chips as they now want their own chip makers to take the lead.

00:03:13: Another sign that the market narrative is changing hands from US to other countries and that the U.S.

00:03:20: no longer an all-powerful and only decision maker.

00:03:23: Alas, even that couldn't give a smile to Chinese technology sucks this morning!

00:03:27: This MIC which one of the leading Chinese chipmakers downed almost five percent at the time.

00:03:33: I'm talking here with the Hansang Index also slipping below is fifty and two hundred day moving average in Hong Kong today.

00:03:40: Unsurprisingly, US and European futures are also in the red this morning.

00:03:45: And the bearish mood is justified.

00:03:47: The rising inflation feels hawkish.

00:03:49: central bank expectations feel expectation for higher rates and ways on valuations.

00:03:55: This does make sense.

00:03:56: What did not really makes sense since a couple of weeks now was the major indices rallying to all-time high levels when investors knew that inflation Was going to be problem as the Middle East tensions prolonged but well strong our earnings and solid guidance from these big technology companies somehow outweighed reswile CEOs of non-technology companies seem worried that the energy crisis, that world is going through today has indeed started eating into people's purchasing power.

00:04:25: Now this setup in place since more than two months now and central bankers have already expressed their view on what's coming.

00:04:33: The RBA raises interest rates, the ECB is expected to hike rates as soon next month.

00:04:38: Some hawkish voices are also coming loudly from the Bank of Japan today!

00:04:42: The Bank of England is on a slippery ground with guilty heels being pressured by political earthquake there... I wouldn't really touch star in Northern UK guilt at this moment because it's just too much political uncertainty.

00:04:55: they're making the fiscal policy path very uncertain in countries where growth and productivity not to believe under pressure.

00:05:04: And finally, in the US there is a big shift The probability of December rate hike now being priced at more than fifty percent.

00:05:12: I will repeat this Activity on funds futures presently pricing at twenty-five basis points or plus rate hike At more then fifty per cent for this december and that's a big ship for the Fed.

00:05:25: That was expected.

00:05:28: And remember, before the war started in Iran, Mark is were expecting that the Fed would cut interest rates this year.

00:05:34: The White House even chose Kevin Walsh as a Fed's next chair partly because he was seen help deliver lower interest rates.

00:05:43: And well, a few days before watch takes over the helm of the Federal Reserve markets are now pricing in and more than fifty percent chance for December rate hike in the US instead!

00:05:53: That's not great news when equity prices are flirting with all time high levels and valuations already looking stretched.

00:06:01: Take Nasdaq hundred for example.

00:06:02: SP ratio today is above thirty eight meaning that correction would actually be healthy to bring these variations back more reasonable and down to earth level.

00:06:13: And if the Nasdaq hundreds P ratio were to move back towards this historical range, that would be somewhere around twenty five to thirty times its earnings what it will likely imply a meaningful pullback in equity prices unless earning growth accelerates fast enough.

00:06:30: How meaningful?

00:06:31: If we take pure maths, a move from PE ratio of third age to thirty for example would imply roughly twenty-to-twenty two percent correction if earnings expectations stayed unchanged.

00:06:43: And assuming that earnings will also grow due the AI adoption, a correction of ten to fifteen per cent may actually be reasonable and that would bring Nasdaq hundred toward the twenty three point six percent Fibonacci retracement level on April.

00:06:56: twenty twenty five today really at a six thousand and six hundred level, add to twenty five thousand two hundred levels which would be near its current two-hundred day moving average.

00:07:08: And in theory, such retreat should not even reverse the positive trend that we saw last year which will remain intact above a twenty-four thousand and eight hundredth level.

00:07:18: Which is the major thirty point two percent Fibonacci retracement on past year's rally.

00:07:23: but it would take some air off of index to allow healthier path north afterwards.

00:07:29: Now this week focus will be on Iran and straight up homes Of course But also on UK inflation data, FMC meeting minutes KMI numbers across major economies around the world.

00:07:40: On earnings front, NVIDIA is due to release its earnings on Wednesday this week after a closing bell.

00:07:46: Now NVIDia's results have been one of most important cues off an earning season about health and AI growth since years now but it no longer THE most important cue!

00:07:56: MVD chips are still the best in the market for training complex AI models, but running them requires CPUs and memory chips.

00:08:05: This is why traditional CPU and memory chip makers like Intel or Micron have been gaining faster compared to NVIDIA in terms of their stock price since months now!

00:08:16: And this also because Korean memory chip maker has taken over headlines.

00:08:21: Korean Samsung for example, this year expected to earn around and twenty billion US dollars in revenue, that's just under what NVIDIA is expected to earn.

00:08:32: So I believe that NVIDia earnings this week could maybe divert investors' attention from the geopolitical worries and the soaring bond yields due to rising inflation but the bar is very high today when it comes to NVIDias results.

00:08:45: an earning speed alone wouldn't automatically lead a positive market reaction especially across global financial markets.

00:08:55: What technology companies also need today is a more stable and predictable macroeconomic setup.

00:09:01: And that doesn't look like it's on the managerial for now, so this is all for this Monday.

00:09:06: I'm Ipek Oskar Deshkaya and thank you for joining me.

00:09:09: Thank You For All Your Beautiful and Supportive Comments!

00:09:13: I hope This Episode of Market Talk has been helpful and It Has Been Insightful To You.

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00:09:44: So I will meet again tomorrow and until then good day trading!

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