August 05, 2024
18:01
“This crisis could be resolved by an intervention by the Fed in the coming weeks,” states Philippe Gijsels, chief strategist at BNP Paribas Fortis.
Money never sleeps. This is how Philippe Gijsels, Chief Strategist at BNP Paribas Fortis explains his readiness to comment on the stock market crash even while on vacation. According to the economist, the Federal Reserve (Fed) should take action in the coming days or weeks.
What explains this sudden downturn in the stock markets?
The scenario of a soft landing for the economy was so anticipated that once data indicated we were heading towards a harsher landing and possibly a recession, investors became worried. They question whether the Fed is “behind the curve.” (Editor’s note: this refers to a situation where the central bank fails to correctly anticipate economic developments and must play catch-up by abruptly changing policy).
“The Fed is likely to intervene soon, initially stating it is prepared to support the markets if needed, and then, if that doesn’t work, cutting rates.”
Why did no one anticipate this greater risk of recession?
We’ve been discussing it for some time, but in my 35 years of experience, this has been the most challenging economic cycle to interpret: there was COVID, followed by a strong recovery, the war in Ukraine, etc. The American unemployment rate has been gradually rising. To some extent, people may say it’s a slowdown but not a serious one. And suddenly, with a figure significantly above expectations, it becomes harder to believe in a soft landing. Personally, I was becoming more cautious about the economy, but I acknowledge that deciphering the signals was quite difficult. Now, things are much clearer.
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What do you expect for the future of this situation?
This crisis could be resolved by Fed intervention in the coming days or weeks. I anticipate the Fed will act before its mid-September meeting, first by asserting its readiness to support the markets if necessary. If that doesn’t work, it should cut rates by 50 basis points, perhaps even 100 basis points.
There are also issues related to the “carry trade.”
The Bank of Japan’s rate hike impacts carry trade positions between the yen and the dollar, leading to a sell-off of assets tied to this speculation. This primarily affects US stocks, particularly technology stocks. The evidence of this issue’s impact is that Europe is losing much less since European assets are less influenced by the carry trade.
“It is not unimaginable that some hedge funds will encounter issues related to carry trade, which could affect all markets.”
How do you foresee the turbulence linked to the carry trade evolving?
These issues could persist for a while longer. The situation might deteriorate before it improves, as nobody knows the extent of the amounts involved in the carry trade. We’re discussing $3 trillion, but it could even be double that.
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Is there a risk of a broader financial crisis stemming from this issue?
This risk persists, albeit less at the banking level than on the hedge fund side. For banks, particularly US regional banks, the anticipated rate cut should be beneficial as they will be able to finance themselves under better conditions. However, it is conceivable that some hedge funds could face challenges related to the carry trade, which may impact all markets.
How should investors position themselves in this new stock market context?
Ultimately, this situation will present a buying opportunity. It is not yet the case today, but central banks will eventually step in. The expected mechanism is clear, but the timing remains uncertain, as we do not know the amounts of positions (carry trade, editor’s note) that still need to be unwound, nor when central banks will act. Last year, a similar trend was observed but to a lesser extent: the months from August to October were quite complicated, followed by a significant rally. It is crucial to remember that during a crisis like this, central banks typically intervene and manage to stabilize the situation.
So we should not fear recession?
Not for stock investment. When a recession reaches its lowest point, it is the best time to invest in the markets because rates will decline, usually leading to a rise in stock prices. Rates act like gravity: when they are high, it is tough for stocks to rise. If gravity is low, or even negative, everything can fall.
Key phrases
- “The economic cycle is quite challenging to decipher. It is much clearer now.”
- “I expect the Federal Reserve to intervene before its mid-September meeting.”
- “The carry trade has an impact. The evidence is that European assets, being less affected, lose much less.
- “When the recession is at its lowest, it is the best time to invest.”
August 05, 2024
18:01
“This crisis could be resolved by an intervention by the Fed in the coming weeks,” believes Philippe Gijsels, Chief Strategist at BNP Paribas Fortis.
Money never sleeps. That’s how Philippe Gijsels, Chief Strategist at BNP Paribas Fortis justifies his availability to comment on the stock market crash although he is on vacation. According to the economist, the Federal Reserve (Fed) should take action in the coming days or weeks.
Understanding the Stock Market Depression
The scenario of a soft landing for the economy was highly anticipated, so when data indicated a potentially severe economic downturn and recession, investors became increasingly concerned. They wonder if the Fed is “behind the curve,” a situation where the central bank fails to correctly anticipate economic shifts, necessitating rapid policy changes.
“The Fed is likely to step in soon, first by saying it is prepared to support markets if necessary and then, if that doesn’t work, by cutting rates.”
Risks of Unforeseen Recessions
The risk of recession seemed distant, but various factors have complicated the economic cycle. Philippe Gijsels reflects, “In my 35-year career, it’s been the most complicated economic cycle to interpret: COVID-19, the strong recovery that followed, the war in Ukraine, and the gradual increase in the American unemployment rate.” While many suspected a slowdown, the recent data painted a much grimmer picture, erasing the hopes for a soft landing.
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Impending Federal Reserve Actions
Philippe Gijsels asserts that this crisis could be resolved by a Fed intervention in the coming days or weeks. He expects a statement affirming readiness to support markets before its mid-September meeting. Should that not suffice, a potential interest rate cut of 50 basis points, or possibly 100 basis points, may be in sight.
Challenges with Carry Trade
The recent rate hike by the Bank of Japan has significantly affected carry trade positions between the yen and the dollar, leading to an asset sell-off, particularly in U.S. stocks and technology sectors. The data indicates that Europe’s losses are minimal, attributed to its assets being less influenced by carry trades.
“It is not unimaginable that some hedge funds will encounter problems related to carry trade, which could have repercussions on all markets.”
Future of Carry Trade Turbulences
The ongoing turmoil linked with carry trade may persist. “Nobody knows the amounts behind the carry trade; it’s estimated to range around $3 trillion, potentially even double,” expresses Gijsels. These uncertainties cast a shadow over market stability as positions unwind.
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Financial Crisis Risks
While the risk of a broader financial crisis is still present, it primarily affects hedge funds rather than banks. For U.S. regional banks, an anticipated rate cut would yield positive outcomes, allowing them to finance more effectively. Nevertheless, hedge funds may face significant challenges related to carry trade, impacting various markets.
Investor Strategies in a Volatile Market
This market turbulence may eventually present lucrative buying opportunities although it may not seem appealing right now. Central banks are likely to intervene sooner or later which could stabilize market conditions. Historical data indicates that similar market patterns often lead to rallies. In times of crisis, central banks usually stabilize the situation.
Considering a Potential Recession
From an investment perspective, there’s no need to panic over a potential recession. When recessions reach their lowest point (the trough), it can be the optimal time to invest. Lower interest rates commonly accompany such periods, which often boosts stock values. The relationship between interest rates and stock performance acts like gravity: lower rates typically allow for upward movements in stock prices.
Key phrases
- The economic cycle was quite difficult to decipher. It’s much clearer now.
- I expect the Federal Reserve to intervene before its mid-September meeting.
- The carry trade has an impact. European assets, less affected, lose much less.
- When the recession is at its deepest, it’s the best time to buy.
