JPow delivers more delays

Local market had a choppy positive day that started negative and grinded back to the positive territory. The big three miners (BHP, RIO and FMG) held the market from falling into negative territory. Size continues to matter as Micro Caps were the best while Large Caps were the worst. Miners and Energy were the best sectors while Retail and Utilities were the worst.

Last week was all about Jackson Hole symposium and US Fed delivered very little to clear the uncertainty. US Fed gave enough to keep the tapering in 2021 but no timeline. The markets were positioned for a negative outcome and a dovish US Fed update drove a short covering Friday bounce. US Fed has confirmed that tapering will start in 2021. The changing voting US Fed presidents was always going to pressure tapering in early 2021. US Fed chair JPow has now flagged to move this year to remove the bullying view in 2022. US Fed has meetings in Sep, Nov and Dec. Sep meeting is in 3 weeks and it looks likely to see tapering timetable. The US Fed has rising delta, fading global growth and rising inflation to keep pushing back on tapering. If they do not announce the timeline in Sep, it is obvious that Dec will be the tapering time table as Nov is the last meeting they can announce in advance as they have announced. US Fed has a shrinking window to taper while markets are facing multiple headwinds as global economic growth starts to fade.

The China geopolitics continues to become a bigger risk for Australia. China has flagged Iron ore as a key commodity that are targeted to manage down. We have seen everything from steel sector regulatory changes and higher lending standards for property market to curb demand. It has been part of the overall China move to reduce commodity prices and reduce consumer costs. We continue to see more downside risk to commodity prices as the regulatory changes remain in play.

Markets are underplaying the Australian economic growth outlook risks. It is consensus view that Q3 is going to see a dive lower but Q4 remains challenging to say the least. The most optimistic outlook suggest normality returning in Nov/Dec while any supply issues or worsening cluster will delay those plans. We still do not have a pathway to vaccinate under 12 kids and we have limited understanding of long covid effects. We are yet to cover the key risk groups like aged care, disability, first nation, health care workers etc. Global trend suggest that vaccination rates start to slow after 50-60%. NSW government has given up on suppression and expects cases to peak in mid Oct. We may be looking at elevated case numbers in NSW into Nov. If we are to learn from Israel, the pathway forward has more question than answers after the mistakes done as multiple levels of government. We are betting on substantially elevated vaccination rates being maintained with supply to make current timeline. It may be different this time!

Comments on US market last close…

US market had the short covering move higher at the open and then mainly traded sideways after US Fed update. JPow flagged tapering by end of year with a lot of conditions while rate hike cycle will be much later with more conditions. This is as dovish as he can get as voting rotations means relative hawks are voting in 2022 and his job extension would be done by then. Still sticking to transient inflation despite PCE yoy hit 30 year high overnight. DOW +0.69%, S&P +0.88%, NASDAQ +1.23% and RUSSELL +2.85%. VIX fell 13% to mid 16. True to his banking background, JPow was backing bubbles and debt over economic slowdown. Market knew rate hikes unlikely for years but tapering was the risk due to fading economic recovery. Guessing game on tapering timetable is narrowed to start in Q4. Will they announce it in Sep meeting or delay? Guessing the trend of weaker data suggest more talk and delays ahead. Yields fell with USD while commodities bounced. China was right again that US Fed won't make the tough decision but will move late. Inflation looks persistent at elevated levels into 2022 while growth likely to be lower. Stagflation risk rising and it may be too late again by US Fed. USD index gave up the recent bounce and back on the down trend. AUDUSD bears will have to cover now. US yields are likely to keep sliding on stagflation risk with rate rise still years away. Oil caught between weaker demand with delta, OPEC supply fudging and seasonal weakness. Metals are caught between China moves, weaker growth and sliding USD. Spot Gold in USD moved above all moving averages and will start to get equities moving on sliding USD, real yields and stagflation risk. Open up thematic will keep moving as governments now more politically motivated to get economy going even at the cost of lives to the pandemic. Vaccine has reduced risk for majority and it is now a pandemic for the unvax. We continue to see upside in gold, agri, media, telecom, staples and thematic sectors like BNPL. Global fintech Affirm up 40% intra day on a deal to offer BNPL to Amazon clients. We now have Sep, Nov and Dec meeting left and market will expect more details in Sep...which is 3 weeks away. Markets will slide with tapering but there is always hope that they delay and delay like they have through 2021. It is going to be a balancing act to taper ahead of stagflation risk taking over. There's only a few months for that window.

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