US Treasury Secretary Yellen warns of a potential entry of the world economy into a period of stagflation

Janet Yellen, Secretaría del Tesoro de EEUU

JJ Fdez-Figares (Link Securities) | As we anticipate could happen, the main European stock indices opened yesterday’s session without major changes and without a defined trend, moving for many hours in a narrow price range until the main Wall Street indices, after the opening of this market , turned determinedly downward. From that moment on, the European indices began to lose ground, to close the day almost all of them with decreases of more than 1%, trend from which the Ibex-35 stood out, despite ending very far from its highest levels of the session, it did so unchanged compared to the previous day’s close. At the end of the day only two sectors were able to avoid losses in Europe: energy and utilities, while stocks in the technology sector and those in the retail distribution sector were the most punished by the investors.

On Wall Street, meanwhile, the session clearly went from “bad to worse”, turning into a real “bloodbath” at the close, with all sectors of the S&P 500 ending the day with significant losses -the one that did the best was that of profits, which closed yielding “only” 1%-, and with only 8 of the values ​​of this index ending the session in positive. At the close, the main Wall Street indices ended with sharp falls, the largest in the specific case of the S&P 500 and the Dow Jones since June 2020. In addition, these two indices marked their minimum levels at the end of the day. exercise, with the former already losing 17.7% in the year and the latter 13.3%. The most penalized securities during yesterday’s session on Wall Street were consumer discretionary, consumer staples and technology. Moderate trading volumes during the day make us avoid the word “capitulation””, since for this to happen the sales volumes have to be much higher than they were YESTERDAY.

Although it has become common in recent weeks that, after a day of strong rallies, investors choose to reduce positions, yesterday there were more factors that caused the strong sales on Wall Street, “tripping the alarm bells” of many investors. In addition to the words of the US Treasury Secretary, Yellen, warning about a potential entry of the world economy into a period of stagflation, we understand that they were the results of the retail distribution company Target which caused the avalanche of sales in the US stock markets. Thus, the company, despite exceeding the expectations of the analysts at the sales level, fell far short of what was projected by them at the net profit level, as a result of the fact that its costs, especially those of transportation and personnel , grew well above their sales, as Target could not transfer them to their final prices, with the consequent negative impact on their margins. Walmart, one of the benchmark companies in the sector, had warned of something similar the day before when it released its quarterly figures. Additionally, Target managers said they expected this trend to continue for the next several quarters. But this was not the only thing that investors did not like. -Target shares closed the day down 25%-. Thus, its directors affirmed that they were observing that consumers were beginning to modify their purchasing habits, spending less on items classified as discretionary consumption, such as household items and clothing, which usually have higher margins, and increasing prices. purchases of other lower-margin commodities. This type of attitude usually takes place when consumers lose confidence in the future of the economy and, therefore, in the future financial situation.

However, “the bad news” on Wall Street did not end Target’s results. After the closure of this market, the technological Cisco published some results that were lower than expected, in addition to revising its business expectations for the next quarter downwards. Cisco blamed the lockdowns in China for its inability to meet the demand of its customers, something that we understand today can weigh on the behavior of many companies in the technology sector, which find themselves in similar situations. In that sense, it should be noted that Cisco shares fell more than 12% yesterday in after-hours trading.

The very negative closing of Wall Street yesterday has taken its toll on Asian stock markets this morning, whose main indices have ended the day with sharp declines. We expect history to repeat itself when the main European stock markets open today, with their indices starting the day clearly lower. We understand that defensive values ​​will be the ones that defend themselves best during the day, although it would be normal that, at least at the beginning of it, the losses were generalized.

For the rest, comment that today’s macro agenda is quite limited, highlighting only the publication this afternoon in the US of the initial requests for weekly unemployment benefitswhich are a good approximation of the weekly progress of unemployment in the country, as well as of the index that includes the main advanced indicators of activity, prepared by the consulting firm the Conference Board, in its case corresponding to the month of April. We do not expect any of these indicators to have a significant impact on the performance of the stock markets, with the behavior of Wall Street, once again, being the main reference for investors in Europe to follow.


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