All eyes are on the US central bank, the Federal Reserve, to see its upcoming rate action to fight inflation. Jefferies’ Global Head of Equity Strategy, Chris Wood, believes that this will be important and that there is a possibility of a year-end rally in the US if things go according to expectations.
Global financial markets are sitting on the edge with respect to the two largest economies of the world. In the US, there is renewed hope for a year-end rally on expectations that both inflation and the pace of Fed rate will be favourable.
In China, there are only worrisome questions on the country’s real estate space, its zero COVID policy, and the implications of Xi Jinping’s third term.
“There is a possibility of a rally into the year-end partly because the next Consumer Price Index (CPI) data point, which should come out just after the mid-term elections has a better base effect, first point. Second, if the mid-term congressional elections go in a way that the market perceives to be positive. I think both those events can trigger a bit of a rally into yearend,” said Wood.
While talking about recession, he said, “The best lead indicator of the recession risk in the US, next year, is the collapse in broad money supply growth. In the last six months, M2 has not grown at all in America. So yes, there is a chance for a rally if that CPI data point comes out lower.”
According to him, there is a need to see major capitulation in the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, but fundamentally, the best sector in the US has been energy.
“Fundamentally, the best sector to have own last year and this year in America is energy, which remains my favourite sector to own stock-wise.”
Talking about emerging markets, Wood said there will be a growing interest in EM mandates ex-China. “Global emerging market investors have to invest in China because it’s a major part of the benchmark, but you will increasingly see, and this process has already begun, you will increasingly see growing interest in global emerging market mandates excluding China,” he said.
He also said that the US dollar rally is in its final stages and that the US could go into recession next year, which could be a risk to oil prices.
For the entire interview, watch the accompanying video