Markets now realising central banks favour asset bubbles over the economy

The local market had a choppy flat day with banks and staples holding it from falling into negative territory. Relatively low turnover continues into the eighth week without a double-digit turnover day. Size mattered as large caps were the best while microcaps were the worst. Property and retail were the best sectors while miners and energy were the worst.

China uncertainty was back again. Chinese tech firms were under more stress while iron ore was on the slide again - doing reform as only China can. Trying to pick the bottom in a large scale strategy is fraught with danger. Tech is overpriced globally, making property valuations look normal. It may be different this time!

Delta waves are hitting around the world. Uneven vaccination rollout has left even the countries with substantial rollout under pressure. A few states like Florida and Texas are running into hospital capacity constraints soon as Delta spreads. 

China is starting to flag over 100 different areas as medium to high-risk Delta exposure areas. The latest updates from China suggest it is putting up restrictions as the Delta variant spreads. It looks inevitable the country will need to enter the most hardcore lockdown phase before things go pear-shaped. Developed markets have mismanaged the pandemic and have sucked out the vaccine supply well into 2022 to fix that. Emerging markets ex-China will start to vaccinate their way out of the pandemic in late 2022 or more likely in 2023. Supply-side issues are not transient. It may be different this time!

The central bank manipulations have gone so far out of reality, markets are unable to separate what is real and what is made up. 

The three major states of Australia are in lockdown while the country’s Budget is fantasy at best, with debt already hitting over $1 trillion. 

Iron ore is sliding like the country's growth outlook and small business is getting smashed and yet the Aussie dollar to US dollar conversion is holding up while the greenback is rising. Bond yields are also confusing the markets. We had a massive miss in ADP payrolls last night and can expect weekly jobless and Non-Farm Payrolls tonight and tomorrow night. 

The US dollar is setting up for a pop higher either way. If the data is strong, then we get taper tantrum risk. If the data is weak, then we have stagflation risk. The data has to be just right. Time will tell.

We continue to look at sectors that will benefit from the eventual equilibrium from the conflicting macro signals. Markets are buying the transitory argument from Central Banks for now. When that becomes more persistent and drives downgrades, markets may not be able to ignore inflation. We continue to favour Gold, Supermarkets, Insurance and Agriculture exposures to be eventual beneficiaries from the cycle clarity.

Seasonal cycles suggest the US market peaks this week as the US reporting season deluge hands over control to macro uncertainty. It may be different this time!

The main data points released in the last 24 hours…

The IHS Markit Eurozone Services PMI came in at 59.8 in July 2021, compared with a preliminary estimate of 60.4 and above June's final 58.3. The latest reading pointed to the steepest pace of expansion in the service sector since June 2006, due to the easing of COVID-19 restrictions. New business increased at the fastest pace in 14 years and the pace of job creation hit a near three-year high. However, operating capacities were tested in July, as evidenced by a joint-record increase in backlogs of work. On the price front, both output charge and input cost inflation rates remained historically elevated. Finally, firms retained an exceedingly optimistic view towards future activity prospects in July, although the level of positive sentiment receded to a three-month low.

Eurozone retail sales were up 1.5% from a month earlier in June 2021, following a downwardly revised 4.1% growth in May and compared with market expectations of a 1.7% increase. June marked a second consecutive monthly increase in trade, due to the loosening of COVID-19 restrictions and growing demand. Sales of non-food products advanced 3.4% (vs 8.3% in May), despite a 2.9% decline in on-line trade. In addition, fuel trade rose 3.8% (vs 8.5% in May), while food sales decreased 1.5% (vs -0.5% in May). Among the bloc's largest economies, Germany reported the largest monthly increase, with sales growing 4.2%. Sales in France, Italy and Spain also rose. On a yearly basis, retail sales rose 5.0% in June, beating market expectations of 4.5%.

Mortgage applications in the US fell 1.7% in the week ended July 30th, after jumping 5.7% in the previous week, data from the Mortgage Bankers Association showed. Applications to refinance a home loan decreased 1.7% and purchases also went down 1.7%. The average fixed 30-year mortgage rate dropped by 4bps to 2.97%, below 3% for the first time since February. "Purchase application volume decreased again, reflecting the ongoing lack of inventory that continues to drive rapid home-price appreciation across the country," Mike Fratantoni, MBA's senior vice president and chief economist, said in a statement.

Private businesses in the US hired 330 thousand workers in July 2021, compared with a downwardly revised 680 thousand increase in June and well below market expectations of a 695 thousand rise. It was the softest pace of job creation since February, adding to signs of a slowdown in the labor market recovery as new COVID-19 cases surged across the country, and despite record job openings and stepped-up attempts by many businesses to add staff. At the same time, scarce raw materials, especially in the automobile sector, continued to hit production. The service-providing sector added 318 thousand jobs led by leisure & hospitality, education & health, professional & business, and trade, transportation & utilities. The goods-producing sector added just 12 thousand jobs, boosted by rises in manufacturing and natural resources & mining employment.

The IHS Markit US Services PMI was revised slightly higher to 59.9 in July of 2021, from a preliminary estimate of 59.8. The upturn softened to the slowest since February, but was much quicker than the series average. Contributing to the less marked upturn in output was a softer rise in new business. Nonetheless, domestic and foreign client demand remained historically strong. In line with larger inflows of new business, backlogs of work rose solidly and at the joint-fastest pace since August 2020. Efforts to ease pressure on capacity was hampered by reports of a shortage of suitable candidates. Meanwhile, input costs and output charges rose substantially despite their respective rates of inflation softening again from May's historic highs. Finally, expectations regarding the outlook for output over the coming 12 months remained strongly upbeat but e degree of confidence dropped to a five-month low.

The ISM Non-Manufacturing PMI rose to 64.1 in July 2021, from 60.1 in the previous month and well above market expectations of 60.5. The latest reading pointed to the steepest pace of expansion in the service sector since comparable records began in 1997, as business activity and new orders rose at sharp rates, due to growing demand following the easing of coronavirus-induced restrictions. At the same time, employment returned to growth while the survey's measure of supplier deliveries rose firmly. On the cost front, prices paid by services industries surged to a 16-year high.

Exports of goods and services from Australia surged 4% from a month earlier to a 23-month high of AUD 43.34 billion in June 2021, amid strengthening foreign demand in the aftermath of COVID-19 disruptions and rising commodity prices. Sales of non-rural goods grew by 2% to AUD 31.42 billion, driven by metal ores & minerals (2%); coal, coke, and briquettes (5%), and other mineral fuels (2%). Also, exports of rural goods climbed 7% to AUD 4.65 billion, led by meat and meat preparations (4%), cereal grains and cereal preparations (11%), wool and sheepskins (15%), and other rural (5%). In addition, sales of services went up 3% to AUD 5.09 billion, lifted by travel (6%). At the same time, shipments of non-monetary gold surged 18% to AUD 2.14 billion. Meantime, net exports of goods under merchanting were unchanged at AUD 37 million.

Imports of goods and services to Australia gained 1% from the previous month to AUD 32.84 billion in June 2021, as domestic demand recovered amid an ongoing COVID-19 vaccination drive. Purchases of capital goods soared 7% to AUD 7.22 billion, boosted by machinery and industrial equipment (7%), industrial transport equipment n.e.s. (36%), and civil aircraft and confidentialised items (24%). Also, arrivals of intermediate and other merchandise goods edged up 1%, mainly led by fuels and lubricants (20%), and organic and inorganic chemicals (3%). In addition, imports of services rose by 1% to AUD 4.48 billion, mainly driven by transport (4%). By contrast, purchases of consumption goods fell by 1% to AUD 9.74 billion, due to textiles, clothing, and footwear (-3%); consumption goods n.e.s (-1%); food and beverages (-1%); and household electrical items (-1%).

Comments on US market last close…

US market reversed yesterday's gains and more to finish negative on the back of delta worries and big miss in ADP payrolls flagging economic growth slowing. Main indices closed at the lows of the day. RUSSELL -1.23%, DOW -0.92%, S&P -0.46%, NASDAQ +0.13%. VIX just ticked below 18. More Fed talkers are pushing for very slow QE tapering in Q4 but there is very little appetite for raising rates. Yields and USD ticked lower before recovering to finish slightly higher. Commodities were lower while Gold ticked higher on growth worries. Tech and Utilities were the best sectors while Energy and Industrials were the worst. Delta is starting to hit China and is knocking the rest of South East Asia even harder. Supply chain disruptions are going to get worse....not transient as Central Banks are hoping. The market will be looking at the weekly jobless data tonight in the US after weak ADP payrolls flagging weak Nonfarm payrolls Friday night.

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