This time it’s Marko Kolanovic at JPM who has had a terrible year. Another marginally bullish signal for equities.
This year we have been above consensus positive. Our positive outlook was based on an assumption that central banks will not make a grave policy error, that the war in Europe will de-escalate over the course of the fall/winter season (resulting in only a mild recession in Europe), and that growth in Asia will accelerate significantly in H2. Importantly, we also observed near record low positioning of fast money investors (hedge funds,systematic investors), which would together warrant a positive market outcome absent a global recession. . And while we still think that Asian growth will be supportive of the global cycle and positioning provides a floor to market, we are increasingly worried about central banks making a policy error, and of new geopolitical tail risks following the destruction of the Nordstream pipelines.
With regard to central banks, since 2018 we have seen several errors that increased macroeconomic volatility (Q4 2018 tightening into a manufacturing recession, 2021 continued easing into the crypto/NFT/innovation bubble, and now again in 2022 with unprecedented tightening into a slowing economy and the war). A potential hawkish mistake followed after a dovish mistake makes for two mistakes rather cancelling out. Given the recent escalation in hawkish rhetoric, the likelihood of central banks committing a policy mistake with negative global consequences has increased, and this started showing in various cracks in FX and rates markets. Even if a mistake is avoided, a delay will likely be introduced for the global market and economic recovery.
