A Historic Market Collapse is Only Delayed, but Not Yet Done

The main EU and US indices, Ibex 35 are stable after the record increases of the last two weeks.

Surprisingly there was a cut of net oil production by OPEC+.

Oil-producing countries including Saudi Arabia and Russia agreed on Sunday to cut production by another 1.16 million barrels a day.

Just when inflation was starting to cool off, oil sharply rose due to the cut in production, which will certainly weigh on the next inflation readings, which I expect to be higher than expected.

This will certainly condition the monetary policies of the central banks, with the FED likely to become more aggressive again.

In the previous article I spoke of a historic collapse on the way: my vision has not changed.

The collapse was only postponed, thanks to the intervention of central banks. The US and Switzerland injected massive liquidity and the FED was also much more gentle than expected by raising interest rates by 0.25%, alarmed by the possibility of a bank crisis.

Anyone who reads my articles knows that I have always considered these injections of liquidity harmful, which in the long run can only make things worse by increasing private and public debt.

Even if governments and authorities insist that the banking system is healthy, they do so only to buy some time and not trigger a phase of panic, and history shows that even in 2006-2007 there were the first signs of alarm with the real estate crisis which generated stock market crashes very similar to the current ones before the great crash of 2008.

The sectors most sensitive to interest rates at this stage are already showing sharp slowdowns: demand for mortgages in the United States is undergoing its sharpest contraction in at least 30 years (-57% y/y in February), with current rates suggesting further deterioration.

The US 10Y-2Y yield curve remains strongly inverted (-87 bps from -72 bps at the beginning of the month), continuing to signal a high probability of recession.

What is happening in the USA will happen in Europe with a few months of delay but in a softer way, as unlike the USA we have a more accommodating central bank and exogenous and non-endogenous inflation which is about to stabilize thanks to the collapse in the price of gas.

In the short term, the markets are therefore rising due to the intervention of the central banks which have only temporarily avoided the collapse of the markets, and because they are hoping for a return of Chinese demand which remains to be verified.

The latest Chinese data are not at all positive: Caixin China General Manufacturing PMI unexpectedly fell to 50.0 in March 2022 from February's 8-month peak of 51.6, missing the market forecast of 51.7.

Every day I have more doubts about the strength of China's recovery momentum amid the continuing housing recession and global financial uncertainty.

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We took good advantage of the market's mini collapse at the beginning of March with an operation on the VIX closed in profit.

Given that the United States will collapse first, the ideal instrument in these cases is the VIX, also known as the fear index, which uses options on the S&P 500 index as underlying, with which it has a negative correlation: if the S&P 500 goes up the VIX goes down and vice versa.

At the end of the month I could return with the same target at 40, as set for the recent operation.

Author's note:

The information and content published do not in any way constitute a solicitation to operate in the financial markets but are simply personal opinions and operations.