Inflation in the driving seat - Tech the circuit breaker? ⚡️

19 may 2022

INVESTMENT CONTEXT

• After a brief break, the rout in equity markets resumed at full speed, with S&P 500 and Nasdaq dropping 4.04% and 4.73%, respectively, marking the worst day in Wall Street since 2020
  
• Turkey is set to veto the entry of Sweden and Finland into NATO, as it resents the countries for their stance on Kurdish groups considered "terrorists"
  
• American big-box retailer Target (TGT) lost a quarter of its market value on May 18 in its worst one-day loss since 1987 - the very same thing happened the day prior to Walmart (WMT) on shifting consumption
  
• China is reportedly in bilateral negotiations with Russia to replenish its oil reserves
  
• Blockchain assets keep tumbling - yet the selloff appears to be tempering
  

PROFZERO'S TAKE

• After taking a breather and in fact attempting to stage a rebound, U.S. equities collapsed over 4% in both S&P 500 and Nasdaq, as fears of recession/stagflation gripped investors. No later than May 18, ProfZero cautioned against bull traps - sudden, brief equity rallies that could trick into believing the bottom has finally been reached. Market fundamentals keep telling a different story - As Adam Posen put it, Russia's invasion of Ukraine is marking the end of the globalization era that kept inflation unnaturally low for two decades. ProfZero sees inflation here to stay (so long, "transitory") until new paradigms emerge for energy (U.S. energy possibly biting into OPEC+ dominance), soft commodities (re-activation of Ukraine ports could bring relief across cereals and fertilizers) and semiconductors (reshaping of global supply chains). Yet, ProfZero is puzzled by the apparent markets' distaste for technology stocks - in the words of Microsoft's CEO Satya Nadella, digital technology is indeed one of the most powerful deflationary forces. A call definitely worth heeding
  
• On May 19, Sri Lanka’s central bank confirmed that the country missed a deadline for foreign debt repayments, thus earmarking the first sovereign default in the Asia-Pacific region this century, according to Moody’s. President Gotabaya Rajapaksa’s government said that the State would stop repaying its international debt to conserve foreign currency reserves for imports such as fuel, medicine and food. The default, sized at USD 51bn, was sadly within ProfZero's radar - and might now be followed by others in developing countries, as the costs for basic staples become unsustainable
  
• Catalysts fail to emerge also on the geopolitical front. The internal confrontation clogging NATO on the accession of Sweden and Finland may in fact rupture into wider ripples, which could end up bolstering Russia's ambitions now that its troops gained control of razed port-city Mariupol. As China warned of a "dangerous situation" forming in Taiwan, while reportedly sourcing crude oil from Russia, ProfZero can't help seeing the looming risk of ramifications spreading from the Ukraine conflict, with anything but predictable outcomes
  
• The European Commission announced a USD 220bn plan to end the EU’s reliance on Russian oil and gas by 2027. The proposal entails importing gas from other countries, accelerating the transition to renewable energy and reducing energy consumption. ProfZero concurs that many good things start with good plans. ProfZero also thinks though that in over 20 years it has seen many good plans in EU - remaining just good plans
  
• A taunt in the meltdown: why crypto's fallout is slowing? Have we all run out of shorts?