Poor visibility leaves markets reeling while battle for Donbas brewing
The rebound in stocks has proven short-lived as continued uncertainties about inflation, speed of Fed’s monetary policy tightening and potential disruptions coming from the war in eastern Europe have all converged to provide heavy headwinds as we go get closer to earnings season. Meanwhile, China’s ongoing Covid Zero policy is slowing economic activity there and further disrupting global supply chains.
Given such poor visibility and high level of noise, it’s logical to assume that earnings multiples are likely to be heading lower. This combined with unusually elevated guidance risks have led us to tilt back towards recommending a net short position going into the earnings reporting season.
In Japan, BOJ’s attempts to suppress JGB yields is quickly devaluing the yen, adding more uncertainties as benefits of weaker Japanese unit in magnifying overseas earnings is being offset by quickly rising household costs. However, we also think further plunge in value of the yen will ultimately force BOJ to surrender to market forces and allow long term rates to rise, bringing a big payday for JGB shorts and could ignite a notable rally in financial stocks.
Moving on to the war in Europe, with Russia regrouping its forces towards the eastern parts of Ukraine, a big standoff in the Donbas region is looking likely. With Ukraine’s seasonally muddy terrain likely to be drying up, some of the logistical challenges Russian army was facing should ease in the weeks ahead. However, as more NATO supplies of heavy artillery as well as more advanced weaponry are on their way to Ukrainian forces, Putin knows he needs to make his move soon as battle for Donbas now seems pivotal.
By finally admitting that Russia has sustained heavy casualties, Putin seems to be trying to harden the resolve of the Russian people, with a new narrative that Russia is effectively fighting a proxy war with NATO, requiring him to finally call this conflict a ‘war’ to tap into Russia’s military reserves. With evidence of war crimes in Ukraine piling up, Putin seems to have little offramp options left and any lifting of economic sanctions as long as he is in power now seems an impossibility.