Growth and inflation fears may have peaked: better trading opportunities

The second quarter of 2022 went as expected in the best trading opportunities of 2Q’22: the US S&P 500 continued to outperform the US Nasdaq 100; EUR/USD rates crossed their March 2020 pandemic low at 1.0636; and the US Treasury yield curve (2s10s) has moved into inversion territory. More and more central banks began aggressively raising interest rates as fiscal stimulus was nowhere in sight.

But the factors that pointed to the drivers of price action in 1Q’22 and 2Q’22 may have run their course. As the Federal Reserve has become increasingly aggressive in raising interest rates, the odds of a Fed rate hike appear to have started to reverse. Inflation expectations in developed economies have stabilized, suggesting that markets believe the current rise in the cost of living is nearing the end of its ascent. While the U.S. economy may have contracted for a second consecutive quarter in 2Q’22, the prospect of supply chain disruptions and weaker Chinese growth may be dampened as the zero- China’s COVID moves away from authoritarian lockdowns; global growth should be slightly better.

Looking to 3Q’22, these factors suggest that more optimistic times are ahead for global financial markets – even as economic data remains weak and sentiment struggles. After all, markets tend to bottom before economies do, which will create cognitive dissonance for many market participants (especially new traders).

CHINA NASDAQ GOLDEN DRAGON INDEX VERSUS US NASDAQ (ETF: HXC/QQQ) TECHNICAL ANALYSIS: DAILY CHART (January 2021 to June 2022)

Source: Trading View

As bad as US stock markets are in 2022, Chinese stock markets are in much worse shape since the start of 2021. Absent an effective vaccine and resorting to draconian lockdowns, China’s economy has proven disappointing over the past 18 months. But now that China’s zero-COVID strategy is moving away from sweeping lockdowns and an Omicron-specific vaccine is set to roll out, the worst may be over for Chinese stocks. After looking at the past six months, the HXC long/QQQ short ratio has started to rise, suggesting a period of outperformance of Chinese equities versus US equities for at least the next few months. The ratio could go from around 28 to 36 during Q3’22.

iSHARES BIOTECHNOLOGY (ETF: IBB) TECHNICAL ANALYSIS: DAILY CHART (Jun 2021 to Jun 2022) (CHART 2)

Growth and inflation fears may have peaked: better trading opportunities

Source: Trading View

While inflation and growth fears in the US have peaked, outdated sectors – those that are economically sensitive – should perform better in the months ahead. One of the star children of risk appetite in US equity markets is the biotech sector, which has formed a double bottom over the past two months. Coupled with a break of the downtrend from the September 2021, December 2021 and April 2022 highs, IBB could trade from 119.40 to 135.57 during Q2’22.

CAD/JPY TECHNICAL ANALYSIS: DAILY CHART (JUNE 2020 to JUNE 2022) (CHART 3)

Growth and inflation fears may have peaked: better trading opportunities

Source: Trading View

CAD/JPY rates have fallen over the past two weeks after hitting their December 2014 high, trading at their highest level since February 2008. But support was found at former range resistance which started in April 2022, suggesting that the technical posture remains bullish. The aforementioned range called for a measured move higher above 108.00, which has yet to be reached, so there is potential for another move higher before exhaustion occurs. A return above the June high at 107.21 would offer a strong confirmation signal that the next leg higher has begun, targeting the 100% Fibonacci extension of the March 2022 low/April high range. 2022/May 2022 low at 111.09.

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Garland K. Long