Capital wars are starting to hit the weakest developed markets

The local market started positive on global buying and mainly stayed flat from there to end a positive week, having moved around 1.7% in eight consecutive positive days. Relatively low turnover continued into the eighth week in a row without a double-digit turnover day. Size mattered as Mid Caps were the best while Micro Caps were the worst. Health Care and Utilities were the best sectors while Miners and Banks were the worst. The Australian dollar to US dollar conversion is near 8-9 month low and starting to look very weak.

The main points affecting the global macro:

(1) Delta waves > US is seeing substantial case increase in low vaccinated states and they can’t do anything about it. State leadership is buried in ideological problem that they will only backflip when hospitals are full and people are dying in the masses. We are not that far away from that scenario in a few states. China is dealing with new delta waves but their vaccine efficacy is near 50%. As much as they can lockdown transport to limit damage, it is very hard to keep things locked up when you are as large as China. We have already seen the power of major ports being shut down due to the virus. If it starts to run wild in a population that think they are in the clear due to vaccination, it may get very ugly very quickly. China knows that and will move aggressively and early to lockdown. We are already seeing some of that and it’s hurting growth and activity in China. Other major manufacturing countries like Japan and South Korea are also in delta restrictions and that will drive down global growth and drive up inflation.

(2) Global Growth > Global activity and travel data clearly backs the slowing nature of the global growth after the Q2 peak. The stimulus effects are starting to wear off while inflation is starting to bite. Supply side issues are getting worse with delta and lack of capex while China regulatory moves are adding more uncertainty. China is on the war path to reduce inflation and break industries to create more competition. It will deliver more growth and lower prices for China in the long term but it comes with short term elevated risk.

(3) US inflation > Market continues to buy the US Fed spin that elevated inflation is transient. Not that costs are going to come back down but won’t keep growing at these elevated levels. The latest Producer Price Index (PPI) beat expectations by a margin from decade high levels. US corporates will have to reduce margins or raise prices. If you raise prices and hit consumer spending, then there will be less spending. Either way, corporate downgrades look inevitable. 2021 data offers big bounce out of pandemic affected 2020 but when you start looking at 2022…it is not flashy. Add downgrade risk to weak 2022 growth and sentiment starts to falter.

(4) Capital Wars > Chase to attract capital in a world of low yield means Emerging Markets are starting to put up rates substantially. Eventually that will drag the Developed Markets to raise rates as capital leaves. Capital leaving will debase the currency and raise inflation. Even if global major central banks fudge the game, Emerging Markets are turning the table on them!

Seasonal cycles suggest the US market peaks this week as macro risks become the main play. USD and Bond Yields are bouncing back. Central Banks are starting to lose the market trust that they can keep it all under control. Will the Central Banks fade the economy into stagflation to keep stimulus going? Time will tell!

Main data points released in the last 24 hours…

Industrial Production in the United Kingdom increased 8.3% from a year earlier in June of 2021, easing from an upwardly revised 20.7% advance in May and compared to market expectations of 9.4%. Industrial production in the UK fell 0.7% month-over-month in June of 2021, following a downwardly revised 0.6% rise in the previous month and compared to market estimates of a 0.3% increase. The fall in production was led by mining and quarrying (-11.9% vs 3% in May) and electricity and gas (-1.9% vs 3.3%). Meantime, manufacturing activity went up 0.2% and water supply and sewerage rose 1.1%. Industrial output was 3.2 below its February 2020 level, the last month of "normal" trading conditions prior to the coronavirus (COVID-19) pandemic. Year-on-year, industrial output advanced 8.3%, following an upwardly revised 20.7% growth in May and below market forecasts of 9.4%.

Business investment in the UK increased by 2.4% on quarter in the April-June period of 2021, rebounding from a 10.7% fall in the previous period though it is still 15.3% below its pre-pandemic levels, preliminary estimates showed. Evidence from the Bank of England’s Decision Maker Panel survey found that in Quarter 2, overall uncertainty for businesses has improved. The%age of businesses that viewed the overall level of uncertainty facing their business as high or very high was 50% in June 2021, the lowest level since February 2020. Coronavirus remained the largest source of uncertainty for 25% of businesses in June, down from 32% in May. Year-on-year, business investment advanced 9.7%.

UK gross domestic product expanded by 15.2% year-on-year in June 2021, following a revised 24.5% growth in the previous month and slightly beating market expectations of 14.9%.

Eurozone industrial production rose by 9.7% from a year earlier in June 2021, following a revised 20.6% growth in May and compared with market expectations of a 10.4% advance. Eurozone industrial production fell by 0.3% from a month earlier in June 2021, following a revised 1.1% decline in May and compared with market expectations of a 0.2% drop. Decreases in the production of capital goods (-1.5%) and energy (-0.6%) were partially offset by growing output for non-durable consumer goods (1.6%), durables (0.1%) and intermediate goods (0.1%). On a yearly basis, industrial production growth slowed to 9.7% from 20.6%, below forecasts of 10.4%.

The number of Americans filing new claims for unemployment benefits dropped for a third straight period to 375 thousand in the week ending August 7th, moving closer to a pandemic low of 368 thousand reached at the end of June and adding to signs of a solid recovery in the US labor market despite the lingering threat of the Delta variant. The total number of claimants is likely to decline further in the coming weeks as more states roll off federal enhanced unemployment benefits ahead of their official September expiration date at the national level.

Continuing jobless claims in the US, which measure unemployed people who have been receiving unemployment benefits for a while, fell to 2.87 million in the week ending July 31st, from a revised 2.98 million a week before and below market expectations of 2.88 million.

Producer prices in the United States increased 7.8% from a year earlier in July of 2021, accelerating from a 7.3% rise in the previous month and well above market expectations of 7.3%. It is the highest annual rate since the current series began in November 2010.

Producer prices for final demand in the US excluding foods and energy increased 1% from a month earlier in July of 2021, the same pace as in June and beating market expectations of a 0.5% rise. Year-on-year, core producer prices jumped 6.2% in July, following a 5.6% rise in June and exceeding market forecasts of a 5.6% advance.

Export Prices in South Korea increased to 111.19 points in July from 107.40 points in June of 2021.

Import Prices in South Korea increased to 119.73 points in July from 115.88 points in June of 2021.

Australia's new home sales tumbled 20.5% month-over-month to the lowest in three months of 4,643 units in July 2021, after a 14.8% gain in the prior month, amid lockdowns in multiple states and eroding confidence, data from Housing Industry Association showed. Sales dropped the most in Victoria (-32.2%), followed by South Australia (-29.4%), Queensland (-25.4%), and New South Wales (-14.8%).

Comments on US market last close…

US market ticked higher on NASDAQ stocks after PPI jumped over expectations of staying flat at decade-high levels. RUSSELL -0.28%, DOW +0.04%, S&P +0.30% and NASDAQ +0.35%. VIX pulls back to mid 15. Costs are running hot on supply-side issues made worse by delta. US Fed taper talk is getting less believable by the day. Yields, USD and commodities barely moved much. China is moving hard on regulations in number of sectors and latest suggest funding for property development is getting pulled. AUDUSD is on the slide. Health Care and Tech lead the sectors while Miners and Energy were the weakest.

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