Fantastic news and developments out of the peace talks between Russia and Ukraine.
This is certainly going better than many of us hoped. It is too early to be sure however and a tactical shift in military focus away from Kyiv may not bring an end to the war. That said, there is some valid hope now.
This was a nice add-on catalyst to the already significant upward momentum in the equity market, but it was not actually the driver.
The conflict in Ukraine will likely eventually end in the permanent partition of Ukraine, with Ukraine confirming itself as a neutral state. That most likely end-game remains perhaps months away, however, and the food scarcity and subsequent inflationary pressures are likely to persist for at least twelve months.
Share buybacks drive market rally
Share buy-backs and a resurgent ‘buy the dip’ no matter what sentiment have been the sole drivers of this rally. Which began long before any positive peace talk developments. One wonders just what this market is capable of?
We have a lockdown on China’s economy which will be crawling in relative GDP terms. Europe will still go into recession even if peace occurred, and consumers in the US are experiencing 7.9%, likely to go to 10%, even 12% inflation this year.
The supply of energy and especially food will remain highly disrupted. There is no end in sight for the global economic implications and damage currently being waged by war and sanctions alike.
Divergence in markets
We are looking at extreme divergence between the equity market and any reasonable take on the economy. Whether that be the major economies of Europe, China or the USA, or the global economy as a whole.
We will be left with a Federal Reserve making not one, but two huge historic level errors.
Firstly, as we said in June last year, the entirely false belief and lack of understanding of the economics of our time, when they persisted with the view that inflation would be “transitory”.
Secondly, right now the US Federal Reserve is making an equally damaging error in feeling it will have to raise rates aggressively to control this new immediate wave of war inflation. This approach will certainly drive the US economy into recession later this year.
The world could be facing recessions in both Europe and the USA simultaneously in the second half of this year.
Stocks will remain elevated by the distortions of buy-backs and cult-like just keep buying sentiment.
The further the elastic band is stretched between stock prices and economic reality, the bigger the eventual crash.
We are tipping in the coming months from the risk of a moderate further stock market correction toward a more damaging collapse type risk.
For now, investors seem intent on ignoring the reality all around them and just keep buying. Particularly senior corporate executives who just can’t seem to get enough of their own stock.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
