Saturday, May 28, 2022

Stock selloff ‘overdone,’ at Fed ‘peak hawkishness’, says JPM analyst

According to a leading market analyst, the panic selling on Wall Street in response to the Federal Reserve’s rate hike to counter inflation is an exaggeration — and an opportunity to snatch up riskier assets like corporate bonds.

JPMorgan Chase’s Marko Kolanovic made the case in Monday’s note to clients – arguing that he disagrees with a growing number of analysts and institutions who have argued the US economy is headed for a recession.

The Dow Jones Industrial Average was up 436 points at 32,682 in recent morning trading on Tuesday, after falling more than 600 points on Monday.

Kolanovic said the Federal Reserve and other central banks have reached an “extreme extreme” over raising interest rates.

“Last week’s selloff appears to be overbought, and has been driven largely by technical flux, fear and poor market liquidity,” Kolanovic said.

On Monday, the Dow closed down 600 points.
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“While we expect growth to moderate, we continue to backtrack on the base case assumption that the global economy is headed for a recession, an outcome that is being increasingly priced by markets,” he said. .

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Kolanovic cited several factors in defending his stance that fears of a recession were unwarranted, including the ongoing COVID-19 reopening, the easing of sanctions in China and a tight US labor market.

Bloomberg was the first to report on Kolanovic’s note.

The “pro-risk” analyst advised clients to buy more corporate bonds — although Bloomberg’s US corporate bond index was down 13% in the first four months of the year.

nyse trader
JPMorgan Chase analyst Marko Kolanovic argued that central banks may have “reached a peak.”
AFP via Getty Images

“The most attractive way to avert the risk/mitigate the recent surge in volatility is to increase allocation to credit, where spreads and yields tend to be higher,” Kolanovic said. “As a result, we increase the corporate bond allocation to our long portfolio by 4% and fund this growth by making equal cuts in the allocation of cash and government bonds.”

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Fed Chair Jerome Powell initially launched a “relief rally” last week when he indicated that the central bank was not considering raising interest rates by more than half a percentage point to tackle inflation, which hit four decades in March. had reached a high of 8.5 percent.

But that relief turned into panic as investors digested the reality that the Fed would need to implement a steady stream of rate hikes to cool the US economy – with many suspecting that the bank was engineering a “soft landing”. was able to reduce inflation. causes recession.

Stocks continued their decline Monday, with the Dow Jones Industrial Average closing more than 600 points lower, the tech-heavy Nasdaq down 4% and the broader-based S&P 500 down 3%. The S&P 500 has been falling for five consecutive weeks.

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