ECB playing it cool; hope it won't have to drop it like it's hot

26 May 2022

INVESTMENT CONTEXT

• According to the minutes of the latest Federal Open Market Committee meeting held in early May, policymakers remarked the need to keep raising the Fed's interest rate, noting that "a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook"
  
• Russia heavily cut interest rates for the second time since the beginning of the war in Ukraine, bringing it from 14% to 11% as annual inflation cooled from 17.8% in April to 17.5% as of May
  
• Thematic investment management giant Fidelity sees increased recession risk as volatility is set to persist
  
• After the collapse of LUNA, Terra project has voted to preserve the community and launch of a new blockchain, LUNA 2.0
  

PROFZERO'S TAKE

• While markets ambiguously read the minutes from FOMC meeting in May, ProfZero sees a rather coherent stance by policymakers, who won't refrain from exacerbating the already tightening monetary policy in order to tamp down inflation. What stood as a surprise to ProfZero was instead Ursula von der Leyen tone at Davos, where the EU Commission President said the EU won't be rushed into withdrawing monetary stimulus, and that supply-fueled inflation should not cause investor "panic". ProfZero concurs inflation in EU is largely imported; yet it fails to agree with Madame von der Leyen - the EU is caught between ailing growth, sticky inflation (flat around 7.5%) and threatened by massive debt loads (Italy above all). A tangle monetary policy alone may hardly undo all on its own
  
• Crude oil bull run is persisting deep into Q2, thus likely translating into yet another bumper quarter for energy majors. With Brent crude firmly above USD 100/boe and European natural gas (TTF) futures above 80 points after years below 20, ProfZero expects more good news for investors in the segment, especially in the form of greater dividend stability and buyback plans. Yet, as now several energy stocks trade at all-time highs (Cheniere, LNG; Chevron, CVX; Equinor, EQNR), ProfZero cautions against potential steep reversals should catalysts form to put a lid on prices - the ramp up in U.S. shale gas production should already alarm industry players, while on the opposite side it would play as a highly welcomed agent of deflation for economies at large
  
• When one of the world's most respected macroeconomists shares his views, ProfZero stands, and listens. Olivier Blanchard warned about swelling inflation as early as February 2021; now the former MIT Professor and Chief Economist at the International Monetary Fund (IMF) sees a "0.9 probability" the economy will return to a low-interest rates scenario, overcoming the tendency for markets to "focus on the present and extrapolate it forever". ProfZero has long been advocating in favor of keeping "cool heads" and focusing on underlying value fundamentals. Professor Blanchard would be proud to know
  
• ProfZero is really puzzled about the dynamics of semiconductor industry. One of the key commodities of the future has been in chronic undersupply for over a year. Yet, sector equities fail to impress, despite the apparent surge in pricing power. NVIDIA's (NVDA) beat on top and bottom line (USD 8.29bn revenue vs. 8.10 forecast; USD 1.36 EPS vs. 1.29) sent the stock sliding 7% in the after market, plunging it down 50% since the November 2021 peak. ProfZero well remembers how beaten energy stocks were during the pandemic, before roaring back in 2022. Is the same narrative brewing the semiconductor space?