Markets Report Q1-2023

In the following image we can see the evolution of the index:

However, despite the good performance, it has been a very volatile quarter, especially in March.

We have started the year with the continuation of the rate hike cycle by the Fed, with the target of 5-5.5%.

However, at the beginning of March, Mr. Powell warned that it would be necessary to review the ceiling upwards, up to 6%, creating a climate of uncertainty and expecting a rise of 50 basis points at the March meeting.

But when fear of inflation seemed to be the most important factor to follow, in mid-March appeared the bankruptcy bomb of Silicon Valley bank, a regional bank in the United States, which, due to its poor risk management in the face of rising of rates, was declared insolvent.

The Fed quickly announced that customer deposits would be safe, seeking calm in the markets.

But in the following week, the fear of financial contagion moved to Europe, and another bank appeared in the United States with solvency problems, the First Republic Bank.

The Federal Reserve began a new QE covertly, injecting 2 trillion dollars with the aim of saving the banking system, thus increasing the reserves on its balance sheet.

We can see this in the following image:

With all this, the fear of inflation was in the background and now the important thing was that the house of cards was sustained.

And it seems that, for now, it has been achieved.

At the meeting at the end of March, the FOMC finally raised 25 basis points, sending a message to the market that they will continue fighting inflation.

In fact, a new rise is expected in May, to remain on hold for the rest of the year, and start the cycle of lowering rates as early as 2024.

In the following image we see the evolution of the rate hike probabilities in these two weeks of madness:

For now, the market has calmed down and equity indices are already in bullish territory.

However, the underlying economic indicators are still very negative and we are still waiting to see if the recession will become official or not.

In the following image we see the evolution of global equities based on 5 fundamental factors of the economy.

These factors are:

1. Falling S&P500 corporate profits

2. Inverted Yield Curve

3. Below average unemployment

4. Contracting manufacturing index

5. 40% of banks with restrictive loan conditions

Depending on the number of occurrences of such factors, performance varies.

Currently, those 5 factors are activated (negative economic conditions), which means that historically the performance of the equities has been negative in the following 6 months:

To finish and as a curiosity, the following image shows the evolution of the market in 2008 and how the collapse of Bear Sterns was the precursor to the subsequent financial crisis.

If the pattern were to repeat itself, the SVB bankruptcy would coincide with the current turn in the market that we are seeing.

In any case, the situation at the beginning of Q2 is bullish for equities.

The next FOMC meeting will be in May, where the last rate hike is expected.

It will be key in this new quarter to see the evolution of inflation, and we will be attentive to any geopolitical developments in Europe, as well as the current banking weakness in the United States.

Have a nice day.