What’s the ‘big squeeze’?
It’s the start of the end of extremely accommodative monetary policy from both central banks and governments. The reason for the support was the outbreak of COVID-19. The high inflation that COVID-19 released is what central banks are scrambling to control now.
The Federal Reserve is trying to find out how quickly it can hike interest rates to control inflation without crippling the economy. The Bank of England now sees growth turning negative in the UK in 2023, the ECB faces Russia/Ukraine risk driving down demand, and China also shows signs of slowing growth. On top of this, the Russian Ukraine crisis has injected further instability into the energy markets adding to inflationary pressures. This means that certain markets could be vulnerable over the coming days and weeks.
Which markets look vulnerable
The US10-02 year yield curve inverted earlier this year and that is a key barometer that has an uncanny ability to project a coming US recession.
This means that US stocks are vulnerable to potential deeper corrections on signs of slowing US growth. It is worth being reminded that the 3600-3700 region on the S&P 500 marks 23%+ apx falls since the highs. Falls below this level tend to result in the US heading into a recession. It also looks like a good area to reconsider dip-buying for the medium term.
Housing markets around the world are starting to feel the peril of their position. Rising costs, more expensive borrowing, and an inflated market after heavy demand are all starting to weigh on sentiment. The housing market looks poised for a sharp correction lower.
Gold and silver
In a stagflationary environment where you get slowing growth but elevated inflation gold and silver tend to gain. If inflation expectations keep rising and growth expectations keep falling then that is the perfect environment for more gains in precious metals. This is a stagflationary environment. Silver in particular is at a key turning point.
As interest rates rise the cost of borrowing will become more expensive. Crucially, access to credit for companies will become tighter. This means the risk of default is higher. So, in a slowing-growth, tighter-debt market companies that were supported through COVID-19 could suddenly find themselves vulnerable to defaults.
So, if we see further signs of slowing growth, but central banks hiking to contain inflation then watch out for the ‘big squeeze’ to potentially impact these markets more and more.