Truth is the first casualty of war

Local market started the relatively positive on US lead before fading to finish slightly positive. We have now delivered 2 consecutive positive days after last week delivering the first 5 consecutive negative days since Feb 2020 (i.e. pandemic crash). Relatively low turnover continued through to the tenth week in a row without a double-digit turnover day. Size continues to matter as Micro Caps were the best while Mid Caps were the worst. Energy and Miners were the best sectors while Staples and Telecom were the worst.

The saying goes “Truth is the first casualty of war” and it perfectly summarizes the problem faced by Central Banks and Governments when it concerns stimulus and pandemic management. Mistakes have been made at multiple stages and numerous levels but that was always expected when you are dealing with a pandemic. What is not expected but inevitable is that Central Banks and Governments doubling down on failed policies and strategies in order to justify that their earlier mistakes were not actually mistakes. It was always the fault of someone else. History shows this has never ever worked over time. It may be different this time!

Global markets are mainly driven by stimulus. Not even what the stimulus does but the concept/sentiment of the stimulus. Japan is the first to move to endless stimulus. They have been down this path for so long that no one remembers when they were not on stimulus. In a twisted world, BOJ has actually stopped expanding their balance sheet. But since the market has accepted the fact that Japan has no other option but keep money printing, it really does not matter what BOJ do. Market assumes that they will return to stimulus like every other time. EU is now in the same boat. After a lost decade for substantial parts of EU, we are moving into another lost decade. When you look at most Emerging Markets Ex China and EU, delta variant is kicking the dead horse further into the economic abys.

This leads us to the leader of the capitalistic West in US. US is leveraged up in asset bubbles like there is no tomorrow. The economy is held together with food stamps as well as holidays from student loans and rent at the bottom end while the top end is drowning in cheap money from US Fed. The banking system is running out of places to lend money. They have lowered lending standards to multi decade low. Things have become so out of synch that the banks are putting back into US Fed nearly twice as much as US Fed QE through the repo market. US Fed can’t create credit. Banks are running out of people offering better risk/return. We are in technical tapering but the market doesn’t care. Inflation and delta waves are fading growth and QE is doing nothing to change that. Then why are we still doing QE where a third of the US Fed QE is buying mortgage backed securities while property prices are at all time high? It is the classic stimulus creates asset bubbles and now stuck keeping asset bubbles high…even if that hurts the majority of the people in the economy. As illogical as it may seem, we are in that cycle and hence the markets are fixated on Jackson Hole virtual symposium. Delta wave has forced it to be a virtual symposium. The lack of activity around the symposium is a case in point of what is happening to the economy overall. Markets are waking up to the fact that earnings are good to talk about but stimulus is what gives markets their extreme multiples. Irrespective of where we are in the earnings and economic cycle, tapering will bash the markets. Don’t expect tapering to be announced but it’s happening anyway.

Australian economy is going into negative Q3 with a real risk of negative Q4. Federal government and NSW government are completely moving away from suppression to vaccination plan. It is clear that NSW has mainly lost control of the delta cluster. NSW cluster is now growing in VIC and NZ. We do not have a pathway to vaccinate young kids. We are yet to cover the key risk groups. Global trend suggest that vaccination rates start to slow after 50%. If we are to learn from Israel, the pathway forward has more question than answers after the mistakes done as multiple levels of government. It may be different this time!

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

The IHS Markit Eurozone Manufacturing PMI edged down to 61.5 in August of 2021 from 62.8 in July, and compared to market forecasts of 62, preliminary estimates showed. The reading pointed to the slowest growth in factory activity in 6 months, although it remained a robust one. Manufacturing output also continued to grow at a pace rarely exceeded in the survey history as a result of the ongoing recovery of demand from the depths of the pandemic, though the rate of expansion moderated for a second month to the weakest since February. Slower production growth was primarily linked to supply chain constraints. Meanwhile, job creation slowed slightly, in part reflecting labour shortages and backlogs again grew especially sharply. On the price front, input inflation eased to a 3-month low but selling prices increased rapidly.

The IHS Markit Eurozone Services PMI stood at 59.7 in August 2021, little-changed from the previous month's 15-year high of 59.8 and compared with market expectations of 59.8, a preliminary estimate showed. Output and new order growth rates cooled from recent peaks as some firms came under pressure from the recent rise in COVID-19 cases, while jobs growth reached the highest since September 2018.

The IHS Markit US Manufacturing PMI fell to 61.2 in August of 2021 from 63.4 in July, below market forecasts of 62.5, preliminary estimates showed. The reading pointed to the slowest growth in factory activity in 4 months although it remained a robust one. New orders slowed slightly but the rate of growth was one of the most marked on record as client demand remained substantial. Material shortages and pressure on capacity led to a slowdown in output growth and an unprecedented deterioration in vendor performance led to the second-steepest rise in backlogs of work in the over 14-year series history. Also, difficulties retaining employees and finding suitable candidates led to the slowest rise in workforce numbers in 2021 to-date. The rate of both input and output price inflation was the fastest on record. Nevertheless, strong client demand and hopes of softer price rises and reduced supply chain delays led to greater optimism regarding the outlook for output over the coming year.

The IHS Markit US Services PMI dropped to 55.2 in August 2021, a third straight month of decline from May's all-time high of 70.4 and well below market expectations of 59.5, a preliminary estimate showed. The latest reading pointed to the weakest pace of expansion in the service sector since December 2020, due to labor shortages, the spread of the Delta variant and supply chain disruptions. New business growth slowed to the softest in a year, with new export orders falling for the first time since February. In addition, the rate of job creation was the slowest since February amid a high turnover in staff. Meanwhile, input costs rose markedly and at one of the fastest paces on record amid significant hikes in supplier prices and greater wage bills. Subsequently, service providers raised their selling prices at a sharper rate. Finally, business expectations across the service sector remained upbeat.

The consumer confidence indicator in the Euro Area fell by 0.9 points to -5.3 in August 2021, the lowest level since April and below market expectations of -5.0, a preliminary estimate showed. Sentiment deteriorated further from a three-and-a-half-year high hit in June, amid worries over rising COVID-19 cases. Considering the EU as a whole, consumer morale dropped by 0.7 points to -6.3 in August.

Existing home sales in the US were up 2% mom to 5.99 million in July of 2021, well above market forecasts of 5.83 million. 3e of the 4 major US regions recorded modest gains and the fourth remained level. Total housing inventory was 1.32 million units, up 7.3% from June's supply and down 12.0% from one year ago. Unsold inventory sits at a 2.6-month supply at the present sales pace, up slightly from the 2.5-month figure recorded in June. The median existing-home price for all housing types was $359,900, up 17.8% from July 2020, marking 113 straight months of year-over-year gains. "We see inventory beginning to tick up, which will lessen the intensity of multiple offers. Although we shouldn't expect to see home prices drop in the coming months, there is a chance that they will level off as inventory continues to gradually improve", said Lawrence Yun, NAR's chief economist.

The Composite Consumer Sentiment Index (CCSI) in South Korea decreased 0.7 points to 102.5 in August of 2021 from 103.2 in the previous month, the lowest since April and marking the second consecutive monthly decline. Households were less optimistic about the current state of the economy (-5 points to 77) and future domestic economic conditions (-2 points to 90). Meantime, sentiment related to future household income edged up (+1 point to 99) while that concerning future household spending fell (-1 point to 107). Consumer sentiment regarding current living standards and future living standards were unchanged at 91 and 96, respectively.

Comments on US market last close…

US market moved up on Pfizer getting full FDA approval and growing sentiment that US Fed won't taper soon due to delta. RUSSELL +1.88%, NASDAQ +1.55%, S&P +0.85% and DOW +0.61%. VIX slide 8% but still above 17. Economic data remains on the slide with EU and US had manufacturing and services PMI slide further than expected but still in expansion territory. Yields were tick lower while USD slide had commodities and AUDUSD moving higher. Iron Ore was sliding again but Gold back above US$1800. Oil bounced over 5% as markets remain in elevated volatility. Energy and Retail were the best sectors while Utilities and Property were the worst. Despite all the talk about earnings, the main play is stimulus.

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