Markets in search of a clear direction

• In the first phase of the year, the indices were also driven by the increase in corporate profits which is now largely priced in

• Stock indices are now discounting the best of scenarios and are at year end consensus levels

• It is understandable that, in this tight situation, the announcement by the Federal Reserve that it will “start of thinking” about normalizing monetary policy in the medium term (two years) has generated volatility

• Until a new bullish story clearly imposes itself we may experience volatility, especially in the summer. Liquidity typically shrinks over of the summer season, the monetary impulse in China is contracting and the re-emergence of geopolitical tensions is around the corner

Almost still, and a little nervous, for lack of ideas. This seems to be the condition of the financial markets by the middle of the year. The happy combination of the continuation of the expansionary monetary policies of the central banks, the powerful plans of the governments to revive the economies and the robust recovery of the cycle (fueled by the global advancement of the vaccination plan) and of the corporate profits made the indices run in the first months of the year. To the point that, in April, the S&P 500 had already reached the level of rise expected for the whole year (4,200 points) and the Stoxx Europe 600 had started well in the direction (4,050 points compared to a consensus of 4,200 points for the 2021).

This “leveling out” in late April, which then characterized a good part of spring.. With the indices that today seem to discount most of the best of the political and economic situations possible, it is therefore not surprising that, in mid-June, operators reacted to the slight change in the narrative of the Federal Reserve (which was not widely expected but also less pronounced than expected) to start normalizing its policies in the medium term (two years). The turbulence that accompanied the meeting subsided almost immediately but it is likely that the emotional reaction of the markets is the mirror of othe maturity of the trend in the short term.

In recent years, we have written this repeatedly in our newsletters, the managers' best allies have been central banks. More than any other economic factor, it was this alliance that fueled the growth of the markets. Certainly an anomaly, originated, as we know, from the great financial crisis of 2008, which today is no longer justified, especially if we consider the fiscal policies of governments. In short, the time has come to return to the market the task of allocating capital and in fact, in the United States, the Fed is cleverly preparing the ground to step back.

If this is the scenario that is taking shape and if we consider the high levels reached by the indices, then we understand that to see the beginning of a new bullish phase, a more solid narrative will be needed for an optimistic vision. This, after all, seems to indicate the state of calm that has characterized the markets in the last two months. To tell the truth, some interesting ideas have arrived from the economy. The quarterly reports of some sectors, for example container transport, recorded better than expected results, reflecting an excellent performance in manufacturing and an acceleration of the economy beyond expectations. The next quarterly season will give important indications in this sense, allowing us to verify the validity of the earnings estimates communicated by many global companies. For now, therefore, the market situation remains that of a fully stretched rubber band, which in itself is a risk.

Until a new bullish trend sets in, there could therefore be a lot of volatility on the markets. Also fueled by three factors of different nature. The first is liquidity: summer, typically, is the season in which liquidity contracts (liquidity is also contracting overall). The second is the beginning of a less accommodative monetary policy in China. The third is the geopolitical factor. With the subsiding of the health emergency (see the newsletter published in May), regional conflicts with a potential global impact (China-Taiwan, Russia-Ukraine, Israel-Palestine to name the main ones) have regained strength. In short, while the markets are convinced of a new story to follow, risks prevail over opportunities.

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