Tapering talk is transient

Local market had a choppy flat day before a last hour pump into the close delivered a positive finish. Relatively low turnover continued for the eighth week in a row without a double-digit turnover day. Size mattered as Micro Caps were the best while Mid Caps were the worst. Tech and Industrials were the best sectors while Miners and Utilities were the worst.

China uncertainty continues as Iron Ore slide breaks below 200 day moving average for the first time since the post pandemic recovery started. China has followed up with raising mortgage rates on new home loans to take the steam off the property market while the rest of the world is adding QE to pump it higher. More and more media articles are flagging that China is not done with their social/corporate realignment strategy. Unlike other Central Banks, PBOC is walking the talk in reducing stimulus and curbing asset bubbles. Time will tell which strategy will pay off for their economy.

Delta waves are hitting around the world. US to China and everyone in between are affected. NSW gold standard has turned out to be fool’s gold under delta strain. Uneven global vaccination rollout has left Emerging Markets with pandemic mess well into 2022. Few states like Florida and Texas are running into hospital capacity soon as delta spreads. China is starting to put travel restrictions and soft locking regions from each other. Supply side issues are not transient. We may be facing elevated inflation into 2022 while growth rate is expected to fade in Q3.

The basic concept of stimulus is to bring forward growth and consumption to deliver a short term boost for recovery. Prolonged stimulus creates a rush of consumption without any long term investment into supply as the demand was always expected to fade after the sugar hit. Since the Central Banks were unable to take the economy out of the sugar hit. We have an economy on constant sugar hit with no real fundamental/structural improvement driven by reform. The longer the stimulus stays, the lazier the economy becomes and the harder for the economy to stand on its own legs. Central Banks have created a global economy that can’t support itself without stimulus. Since the asset bubbles are too big to fail, we are in a situation where tapering is just talk. Reality is that Central Banks will continue to keep adding more QE with transient inflation and full employment marketing pitch while knowing quite well that inflation will curb growth and never deliver the full employment target. Central Banks will continue to talk tapering but will not move. Sooner or later the markets will realize the economy can’t support the asset bubbles with more QE. Banks are already at multi decade low credit/lending standards. More money printing will not help the banks to drive more credit growth. 

Credit growth is the economic growth booster. Inflation without credit growth will create economic growth risk. Asset bubbles are drowning in cheap credit. Tapering talk is transient!

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. 

Non Farm Payrolls tonight to raise risk. Expectation are all over the park but bigger question is what will the markets do? Just about anything!!!

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!

Let us run through the main data points released in the last 24 hours…

The IHS Markit Eurozone Construction PMI edged down to 49.8 in July 2021, from 50.3 in the previous month, pointing to a marginal reduction in overall construction activity amid rising costs and raw material shortages. Home building activity growth eased to a three-month low, while work undertaken on commercial construction projects fell for a 17th month in a row and civil engineering activity contracted for a 24th period. Overall new business declined for the first time since February, while suppliers' delivery times continued to lengthen rapidly. On the price front, input cost inflation hit a fresh series record high for the fourth month in a row. Looking ahead, business confidence was little-changed from June's two-year peak.

The IHS Markit/CIPS UK Construction PMI fell to 58.7 in July 2021, from an all-time high of 66.3 in the previous month and below market expectations of 64.0. The latest reading signaled the slowest overall increase in construction output since February, amid difficulties in keeping pace with the recent surge in demand for construction projects, especially due to raw material supply shortages and shrinking sub-contractor availability. House building was the best-performing category in July, followed closely by commercial building. Total order books rose the least since March and employment continued to rise at a solid pace, amid reports of longer wait times for supplier deliveries. On the price front, a rapid pace of input cost inflation continued in July. Finally, business confidence eased to a six-month low, but remained strong overall.

Canada posted a trade surplus of CAD 3.23 billion in June of 2021, compared to an upwardly revised deficit of CAD 1.58 billion in the prior month and against market expectations of a CAD 0.68 billion gap. It was the widest trade surplus since September of 2008. Total exports rose 8.7% to a record CAD 53.8 billion in June, with increases seen in 9 of 11 product sections, driven mostly by sales of energy products (+22.9%), followed by motor vehicles and parts (14.9%) and metal and non-metallic mineral products (12.7%). Meanwhile, imports fell 1.0% to CAD 50.5 billion, with decreases observed in 7 of the 11 product sections, in particular consumer goods (-3.7%) and motor vehicles and parts (-3.8%).

The trade deficit in the US widened to a new record of USD 75.7 billion in June 2021, from a revised USD 71.0 billion in the previous month and compared with market expectations of a USD 73.9 billion gap. Imports jumped 2.1% to an all-time high, adding to signs that domestic demand consolidated its recovery from the pandemic hit, while exports rose at a softer 0.6%.

The number of Americans filing new claims for unemployment benefits fell for a second straight week to 385K in the July 31st week, and broadly in line with market expectations of 384K, confirming progressive labor market recovery. Still, the number is markedly elevated compared to a weekly average of just over 200K in 2019. Many companies struggle to hire employees as enhanced unemployment benefits, ongoing child care responsibilities and health concerns may discourage some workers from looking for a job. The total number of claimants is likely to decline further in the coming weeks, due to the early phase-out of federal enhanced unemployment benefits across many states ahead of the official September expiration date, and as schools reopen and demand over the summer picks up.

Continuing jobless claims in the US, which measure unemployed people who have been receiving unemployment benefits for a while, declined to a fresh pandemic low of 2.930 million in the week ending July 24th, from a revised 3.296 million a week before and well below market expectations of 3.260 million.

Services PMI in Australia decreased to 51.70 points in July from 57.80 points in June of 2021.

The index of leading economic indicators in Japan, which is a gauge of the economy a few months ahead and is compiled using data such as job offers and consumer sentiment, increased to 104.1 in June from a final 102.6 in the previous month. This was the highest reading since February 2014, as a recovery in the economy from the coronavirus pandemic gained momentum on the back of a ramped-up coronavirus vaccination program.

Household spending in Japan unexpectedly dropped by 5.1% year-on-year in real terms in June 2021, after an 11.6% surge in May and missing market estimates of a 0.1% growth. This marked the first decline in personal consumption since February, as spending deteriorated following the latest wave of COVID-19 cases.Spending fell for food (-1.6% vs 2.1% in May), fuel, light & water charges (-5.8% vs -2.4%), furniture & household (-21.7% vs-2.6%), clothing (-15.1% vs 13%), transport & communication (-5.8% vs 23.5%), and culture & recreation (-0.2% vs 24%). In addition, consumption grew softer for medical care (2.7% vs 14.9%), housing (1% vs 28.9%), and education (12.1% vs 22.8%). On a monthly basis, household spending unexpectedly dropped by 3.2%, missing consensus of a 2% gain and after a 2.1% fall in June.

Comments on US market last close…

US market continues its flip flop moves with a positive day ahead of nonfarm payrolls update. US market hasn’t had two consecutive positive days in the last two weeks. Weekly Jobless data was as expected while uncertainty in nonfarm update tonight is high. Expectations range from 350k to 1250k. RUSSELL +1.81%, DOW +0.78%, NASDAQ +0.78% and S&P +0.60%. VIX slide to low 17. Debt ceiling negotiations barely happening while treasury moves into emergency mode. Brokers upgrading market and bond yield targets as they chase to stay ahead of share prices. Yields climbed while USD mainly flat. AUDUSD strengthened despite lockdowns and Iron Ore falling to low $170. Oil up on Middle East worries, Copper ticked higher, and Gold ticked lower. Robinhood fell 20% after running nearly 100% in 2 days...crazy times. US is seeing around 100k Covid cases daily while China is starting to put restrictions on transport and schools as delta spreads. Fauci is worried US may create a new severe variant and pushing booster shots for people with weak immune systems. Banks and Energy lead the sectors while Health Care and Staples were the laggards.

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