Is This a Bear Market Rally or an 'All Clear'?

Last week started with an ominous tone: -- Equities, bonds and most commodities were all down at the start of the week. -- That created concern that some risk-parity strategies were in trouble. -- There was a lot of chatter about the dollar losing its appeal as a reserve currency. But then a series of announcements indicating the possibility of at least a ceasefire in Ukraine, followed by a Fed that bent over backwards to create the so-called dovish hike led to an intense rally. The Nasdaq 100 rallied more than 10% from its lows! So is the worst behind us? Or was that just another blip in what has been a significant downtrend since the first week of the year, when the FOMC Minutes were released. War It seems less likely that we will get a ceasefire in Ukraine after last week. There had been some optimism, which I shared, but that has dissipated. Russia continues to attack and seems to be hitting more civilian targets. An it issued an ultimatum for Mariupol to surrender. While talks continue, it is apparent that the definition of neutrality and security agreement may be rather far apart. Russia seems to want a deal which, from a Ukrainian perspective, would give them time to re-organize, re-arm and ultimately the ability to re-invade a Ukraine with a reduced military. On the other hand, with Ukraine it seems difficult to create a legitimate security guarantee that doesn't somehow resemble NATO, which Russia won't accept. So, we continue down the path of Putin cannot win, but he cannot afford to lose either. I think we will see second order effects start to hit the European and even global economy in the coming days and weeks and that will pressure the market. China As with so much else, China is the lynchpin. If China, while saying they don't support the war, keeps buying Russian commodities, engaging in long-term, strategic deals with Russia and even, it seems, acting as their banker, then the sanctions will be far less effective. It is also concerning, from my perspective, that India has been more keen to purchase commodities on the cheap, in their own currency, rather than support the sanctions. While not directly related, China seems to be making overtures to the Saudis about closer ties. While the dollar will remain the reserve currency, I expect to see many countries that have different values from us, potentially shift towards doing more with China in their own currency. Having watched what is happening in Russia, countries that are concerned the U.S. might turn their wrath on them, will diversify their exposure. There are also stories circulating about the immense hoard of commodities China has already accumulated. That could be seen as them sanction proofing themselves. I do think we need to look at supply chains through a national security lens and think domestic energy and commodity companies will be big beneficiaries, as well as companies that focus on logistics. Also, Canada, Mexico and Latin and South America should do well as we align supply chains to those that are either more aligned with our values, or simply closer from a geographical standpoint. I have yet to see China back down in its support of Russia's economy and am very nervous we could see some selling of Treasuries by China and other countries, which would act as a headwind for stocks. The Fed The market had set itself up for a dovish hike and convinced itself that is what we got. Yes, hikes will be slow and well telegraphed and data dependent, but away from the data dependency, the market may have fooled itself. Post FOMC speakers have sounded very hawkish. Markets ignoring the recent speakers. Possibly because the Powell conference seems to allow us to ignore them, but I am always nervous that when the first speakers out of the gate seem to be trying to correct the market response, we should listen. Balance sheet reduction. The January minutes, which talked about balance sheet reduction, spooked the market. With that being said, I was surprised how few of the press conference questions were geared towards this subject. I think the balance sheet reduction, likely to be mentioned in more detail in the upcoming Minutes, pose a risk to the recent rebound. Bottom Line While the rebound was pleasant, I am treating it as a bear market bounce, rather than an all-clear signal. I'm watching China, the Fed and Russia, in that order, to try and assess whether to change that view or not.

Is This a Bear Market Rally or an 'All Clear'?

We continue down the path of 'Putin cannot win, but he cannot afford to lose either.'

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