Don't stop doing the rain dance - but sand may come first

May 18, 2022

INVESTMENT CONTEXT

• Ukraine is doing "everything possible and impossible" to save the remaining troops still trapped in Azovstal steel mill in Mariupol. Russian authorities confirmed the surrender of 959 fighers, and the plans to interrogate the soldiers upon charges for "crimes committed by the Ukrainian regime against the civilian population"
  
• Finland and Sweden submitted official requests to join NATO. Secretary-General Jens Stoltenberg dubbed the even a "historic moment"
  
• Inflation in Britain soared to 9% in April, the highest annual rate in more than 40 years; the reading was driven in large part by electricity and gas prices
  
• Japanese GDP shrunk by 1% in Q1 2022 on an annualised basis, as consumption was hit by soaring energy and food prices
  
• U.S. Largest retailer Walmart (WMT) posted mixed results for Q1, scoring USD 1.30 EPS vs. USD 1.48 expected by analysts despite top-line beat
  
• Fed Chair Jerome Powell said the Central Bank needed to see "inflation coming down in a clear and convincing way"
  

PROFZERO'S TAKE

• Markets' crave for dovish news does not contribute to lowering the persistent volatility. At The Wall Street Journal's Future of Everything Festival, Fed Chair Jerome Powell confirmed the Central Bank will act "without hesitation" to lower inflation, acknowledging that "there could be some pain involved to restoring price stability". ProfZero argues that some pain has indeed been felt already - ask any holder of blockchain-related assets or more simply Growth stocks. Yet, ProfZero also concurs not all hope is lost for a "softish landing". If the U.S. labor market remains strong - 3.6% unemployment and more than 11.5 million unfilled jobs testified that at the last reading, along with consistent beats across corporate earnings - the real economy could prove resilient enough to absorb the rate hike impact. Yet, as already anticipated on May 10, ProfZero sees a potential toxic catalyst ready to unravel - namely, the unpredictable impact of higher rates on mortgages and the broader housing market. We all remember 2007-8; no one really wants to go back to that, right?
  
  
• Equities scored a rare back-to-back positive day after closing the recording six straight weeks of losses. Despite disappointing results from Walmart, the S&P 500 reclaimed 4k threshold clocking +2.02%, whilst Growth-intensive Nasdaq looks set to test 12k resistance after adding 321 points (2.76%) on May 17. At the time of writing though both indexes are giving back part of the gains, retreating 0.25% and 0.47% respectively. ProfZero remains solid in his conviction that much of the uncertainty has not been resolved yet, in contrast to JPMorgan Quant Strategist Marko Kolanovic, who instead asserts that markets are now overpricing recession risks, thus possibly opening the opportunity for a short-term rally in equities. With crude oil still well within the USD 100/boe bracket; EU interest rate policy still to emerge; and China's zero-COVID policy choking the world's second largest economy, any rally, according to ProfZero, would rather look like a reckless rush
  
  
• The largest engine of inflation, energy, is set to dominate the geopolitical debate for at least the rest of the year. As Saudi Aramco weighs options to list up to 30% of its trading arm for an estimated Enterprise Value of USD 30bn, ProfZero has not failed to notice in EIA's last Short Term Energy Outlook the prospect of rampant crude oil production, up from the current 20mboe/d to 22mboe/d by the end of 2023, while OPEC and Eurasian outputs are set to decline. The last time shale gas overtook established players, one of the steepest price crises erupted, sending crude oil down by 50%. No wonder some now wish history to repeat itself
  
  
• While sheltering from the sand storm that has hit the Gulf Region, ProfZero warned against the sudden flare up of BTC as speculators drove up volatility ahead of JPow's speech. The current sidelining phase is eerily reminiscent of the one that preceded April 29 - and there is no positive catalyst whatsoever to justify any near-term ramp up. ProfZero plays it cool - even in the eye of the storm, either rain or sand!