#Global #investors #woke #beautiful #dream #riskoff
Progress in the fight against inflation has stopped, announced the head of the US central bank. He thus confirmed what economists had been warning about for months, but what global investors did not want to believe. As a consolation, Jerome Powell said that interest rate cuts in the US are more likely than their increases. And data from the American labor market show that… the economy is slowing down. Will there be rate cuts or not? In the minds of investors, the so-called risk-off
Until recently, there was a lot of chaos on the capital markets. Investors bought shares at arbitrarily high prices, factoring into their value future interest rate cuts in the US (which were later to spread to other markets). It is known – cheaper money means cheaper investments, more money in consumers’ pockets and higher profits of companies. In turn, bond buyers lost hope for future high interest rates on American bonds and looked for better opportunities in other parts of the world (bond yields and the dollar exchange rate fell).
So we had a boom on the Warsaw Stock Exchange (investors considered our market to be one of the most “forgotten” by God and capital) and a rapidly rising zloty (because investors believed that Polish bonds had a chance to pay good interest for a much longer time than American bonds).
Investors suddenly woken up from a beautiful dream? Or maybe not yet?
Who cared? Economists have long warned that the fight against inflation is not over yet. And the heads of central banks repeated ad nauseum: “higher for longer” – interest rates will remain high for longer than we expect. However, investors did not care about the “old guys” from central banks. Energy prices are low, food prices have stopped rising, the war in the Middle East has not caused complications in world trade – why wouldn’t inflation fall and then interest rates?
And yes, inflation dropped from 8-9% in the summer of 2022 to 3.1% earlier this year, but has now rebounded to 3.5%. Therefore, it is no longer heading to the level of 2%, which would justify lowering interest rates. They are relatively high in the USA, amounting to 5.25-5-5%. For half a year now, analysts have been wondering when the first rate cut will finally happen, but it still hasn’t happened. And at its May meeting, the Fed did not decide to cut either.
Moreover, central bank governor Jerome Powell said progress in the fight against inflation had stalled. On the other hand, the US economy seems to be resistant to high interest rates for now, there are no fewer jobs in the country and consumption is not falling (despite the most expensive loan in 20 years). Therefore, the Fed does not risk much by maintaining the “higher for longer” strategy.
Powell, in his remarks Wednesday after the federal reserve meeting, also rejected the idea that the Fed would declare victory with inflation at 3%. “Of course we are not satisfied with three percent inflation, ‘3%’ cannot be in my mouth in the same sentence as the word ‘satisfied’. I still expect inflation to decline, partly due to the lagged effects of slower house rent growth.”
Investors betting that interest rates will eventually fall are revising their expectations. At the beginning of the year, the valuations of bonds and futures contracts for the future level of interest rates assumed six interest rate cuts of a quarter of a percentage point each (i.e. a drop in rates from 5.25% to 3.75%). Today, they only assume one or two rate cuts within a year. The chart below shows expectations expressed in basis points (reverse scale).
Higher for longer in practice – one reduction instead of six
Meanwhile, two days after Jerome Powell’s loud statement, signals came from the American economy that… the economic slowdown is reaching the United States. Friday employment report showed that the economy created 175,000 jobs in April, which is twice as much as in March. (315,000).
This is consistent with recent reports from major U.S. food service providers. Starbucks and McDonald’s wrote in their quarterly reports that they see consumers becoming increasingly cautious. And Kraft Heinz admitted that restaurants and hotels are buying less of its products. In April, the economic situation in the services sector also declined for the first time in 15 months. “Employment and new orders and business activity declined,” the economists wrote Goldman Sachs in discussing the study results.
This Friday’s news caused investors to once again have a dilemma: on the one hand, Wednesday’s speech of the head of the US central bank announces that inflation will not fall quickly and interest rates will remain high, but on the other hand – signals of cooling of the economy (which may lower inflation and allow lowering rates) are becoming more and more noticeable.
Higher for longer, or… what?
The prospect of continued high interest rates in the US would have numerous consequences for global investors. For example, there are higher expectations regarding the interest rates on bonds issued by the American government. The yield on 10-year bonds listed on stock exchanges, which was below 4% at the beginning of the year, has recently reached 4.7%. We are very close to the psychological limit of 5% per year, which would mean investors’ complete disbelief in overcoming inflation.
Risk-off, but bond yields are up
On the other hand, investors must revaluate shares – the risk-free rate, i.e. the interest rate that can be obtained from safe bonds, is an important factor building stock valuations. The more you can earn without risk, the higher the rate of profit growth investors expect from companies. Previously, they were satisfied with lower ratios because bond yields were lower. Now the situation is changing. And the downward correction on the stock markets began.
All this creates a picture that analysts call risk-off, i.e. the decreasing willingness of investors to take risks and the overwhelming desire to “bunker” money in safe, high-interest securities of the American government that provide real risk-free profits.
Who should care? Those who invest in the cryptocurrency market are already concerned. In mid-March 2024, on the wave of the so-called Bitcoin halving, the valuation of the most popular cryptocurrency exceeded $73,000. But if we have risk-off, the most volatile asset class is “at risk”. Just now, bitcoin fell to $56,500, which was its largest decline in a year and a half (nearly 22%). It eventually rebounded to $61,000.
How does risk-off affect bitcoin prices?
Investors are wondering how long the declines in stock markets (including in Poland) will last. Whether they wait patiently for good things to come back or take profits and stay without risky investments for a longer time, they are waiting for the end of risk-off. A chart that can be very helpful for this assessment posted on Linkedin by analyst Jarosław Jamkawhich shows how individual assets behaved during the previous risk-off.
Previous risk-off and share prices
How long will the risk-off last and what can it bring?
The American stock index lost approximately 10% of its value then, and the scale of the correction will be the same unless something unexpected happens – this analyst expects. For now, we are halfway through the designated range of declines. The scale of share price declines in other markets may – but does not have to – be greater than in the US. On the one hand, risk-off further “turns off” the demand for shares for the so-called emerging markets than developed ones, but on the other hand, the shares of American companies have been the most “inflated”, so in their case the potential for declines is greater.
We can forget about the very strong zloty for some time. The value of the Polish currency has recently been astonishing, we were paying PLN 4.25 for the euro and it seemed that it would only get better. But now the zloty has returned to the levels of PLN 4.30-4.35 (although it would be cheap only if it approached the zone of PLN 4.6-5, which is unlikely to happen).
The dollar is again above PLN 4, which means more expensive fuel and generally slightly higher inflation in Poland (and more expensive holidays in the euro and dollar zone). Anyone planning a trip should buy foreign currencies in installments. In the chart below, pay attention to the black line, it is the dollar index, i.e. the “green” quotations not against one, but against the entire basket of currencies.
Risk-off will strengthen the dollar
Many Polish investors have money invested in bond funds. Difficulties in the fight against inflation and lower chances of a drop in interest rates are a bad circumstance for such funds (they earn the most when there is a prospect of a drop in interest rates and the bonds they hold are highly valued on the market because, for example, they guarantee a high fixed interest rate for many years ). It is not that there will be no decline in interest rates, but perhaps the prospect of profits of 7-8% per year from bond funds will shift slightly.
Risk-off, on the other hand, is a mixed good for gold holders. It is true that its price, after reaching a record level of $2,400 per ounce, dropped to around $2,300, but this is quite a minor correction, considering the scale of the previous “geopolitical” boom. Will gold become cheaper? On the one hand, every risk-off is a good time for gold (this was the case recently, as shown by Jarosław Jamka’s chart). On the other hand, the reason for this risk-off is related to the high interest rate on bonds. If you can make money on bonds, why buy gold that doesn’t pay interest?
Risk-off and gold
The prospect of an ounce of gold at PLN 10,000 is definitely receding (a few weeks ago we were already close, gold cost PLN 9,900), because gold will not necessarily break further records in dollars, and the zloty may weaken. If gold could be bought again below PLN 9,000 per ounce, it could be a bargain (currently the price is PLN 9,300).
Risk-off, or… opportunity
For investors with a stable long-term portfolio, this situation may be an opportunity to buy some things at bargain prices. Shares may be a bit cheaper, maybe it will be possible to hit the bottom in bond fund prices, there is a ghost of a chance for cheaper gold, not to mention cryptocurrencies (if someone respects this asset class).
Jerome Powell gave investors some solace. Well, in his opinion… an increase in interest rates is unlikely. Who would have thought a dozen or so weeks ago that investors would respond enthusiastically to such statements by the head of the US Fed? Today, investors are so scared of the receding prospect of rate cuts that they are even happy with the statement that at least there will be no increases.
Such poor moods of recently optimistic investors may increase the scope of the stock market correction, make the dollar even more expensive and bitcoin even cheaper. With 10% of your portfolio for “opportunistic” investments, you can enjoy and look forward to discounts like a weekend promotion in a supermarket.
————
WHERE WILL YOU GET THE BEST PERCENTAGE?
Are you afraid of changes in Belka’s tax? Wondering what to do with your money? Check out “Okazjomat Samcikowy” – these are constantly updated rankings of deposits, savings accounts, as well as personal accounts, business accounts and credit cards. You will find all tables in the “Rankings” tab on the home page www.motywnieofinansach.pl.
————
I INVITE YOU TO THE WEBINAR!
I invite you to an online meeting where, together with Andrzej Nowak from UNIQA TFI, we will try to answer the question “what about this bull market?” Together with you, we will discuss how to invest money in the coming months and how to invest it in the retirement horizon. We will also answer your questions. Live and uncensored!
During the meeting to be held 9.V.2024 r. oh god 19.00we will try to answer the following questions:
>>> How the stock market has changed in recent months and what does it change in investors’ minds?
>>> Are stocks expensive or cheap today? Are we at the beginning or end of a bull market? Should we be afraid of a meltdown?
>>> Are Polish shares still an investment opportunity? Or maybe they are slowly losing their shine?
>>> Will inflation return and if it rebounds and increases bond yields, could it worsen the scenarios for the stock market?
>>> The latest trends in investing. What is worth investing money in today?
It is worth registering in advance because, firstly, the number of places is limited, secondly, only participants taking part in the live meeting will be able to ask us questions, and thirdly, only registered participants have a guarantee (or priority) of access to the meeting recording (including for presentation). To register, click the link below.
————
MACIEJ SAMCIK RECOMMENDS:
>>> Invest your retirement savings in TFI UNIQA funds simply and cheaply. Under the “Cheap Savings” program, you can buy funds investing around the world without distribution fees. The management fee is – for some funds under “Cheap Savings” – 0.5% per annum. To open a “Cheap Savings” account and start investing money online, click this link. Or watch this webinar in which – together with Paweł Mizerski from UNIQA TFI – we create retirement strategies.
>>> Buy gold bars conveniently “piece by piece” at GOLDSAVER.PL. In this online store (owned by the renowned gold seller Goldenmark), anyone can buy a gold bar at your own pace and without obligations. Click ten link, create an account and you will receive a bonus of PLN 100. You can also enter the code “SoF” in the registration form. There is a subjective review of this solution here.
>>> Invest some of your savings abroad using the RAISIN platform, which connects Polish savers with financial institutions from other countries. The platform allows customers to deposit money without having to re-confirm their identity or gain access to each foreign bank. HoistSpar – the first institution to join the Polish Raisin platform – offers secure deposit accounts in Sweden, Germany, Poland and the UK. Create a free account with Raisin hereand then place an order to create a deposit, transfer the money and test the new European saving platform available in Poland.
>>> Check out SAXO BANK’s special offer for readers of “Subiektywnie o Finansach”. How to manage money in unstable times? There are several rules: firstly, liquidity (a large part of the money at hand), and secondly, diversification – also geographically. More about her here. The Danish Saxo Bank has a special offer – exclusively for readers of “Subiektywnie o Finansach”. Her details can be found here. Anyone who opens an account with Saxo by the end of May this year. and deposits money in any amount within 30 days of opening the account, will be able to invest in stocks, ETFs, bonds, futures and options, commission-free for three months (up to EUR 250 of commission value). If someone is not ready to invest, Saxo offers good ones interest rate on money in the account.
>>> A portfolio of global investments – composed of shares, currencies and raw materials – build with XTB to have everything in one place. Like many other investors – I use and I recommend the XTB investing application, where you do not pay a commission for investing in ETFs from around the world (up to EUR 100,000 in turnover per month), and you can build a portfolio of various assets. If you want to use CFDs, i.e. contracts containing financial leverage, remember that you risk all your capital and that most individual investors achieve losses on such investments. Think it over carefully.
XTB has introduced a new way of investing on the market – Investment Plans. They allow you to safely and free of charge invest in ETF portfolios from the world’s largest providers. More about them you can read here.
>>> Check out a home loan with a fixed interest rate for 10 years at BNP PARIBAS. It is a bank that offers money for real estate in a convenient, safe and responsible way. “Subjectively about Finance” together with him educates you on how to borrow money for a flat so that it is an investment. Details of a safe loan with a fixed interest rate for up to 10 years at BNP PARIBAS BANK POLSKA check here.
>>> A mortgage loan with a low own contribution for 35 years – this is one of the offers of ALIOR BANKwith whom “Subjectively about Finance” jointly guides you through the meanders of entrepreneurship, responsible money lending and digital financial services. Details of this proposal under the slogan “Megahipoteka” can be found here
———————–
WANT TO PLAN FOR WEALTH? MUST READ! Do you think you have no chance of living as a pensioner? That you don’t have enough savings? That you don’t earn enough? That you wouldn’t know how to invest money well if you had it? In this e-book I show that With a bit of consistency, thought and a good plan, almost anyone can become an annuitant. How to save painlessly, invest easily and now plan your annuity – that’s what this e-book is about. Practical advice and tips. I invite you to read – it is a simple plan for your financial independence.
———————–
cover photo: CNBC
