Vaccine wars: Reality is scarier than fantasy

The local market had a choppy flat day on low turnover. We have now finished three weeks of low turnover as holiday season takes effect. Tech and telecom were the best sectors, while healthcare and energy were the worst. The turnaround in banks were the main factor in recovering from the day’s lows. 

The key factor remains the global investors moving in and out, while local institutional investors were on holiday. Retail investors were in fine form with micro caps up for last five trading days in a row. When you also add holidays, that’s nearly a week-and-a-half of non-negative days. 

There were no real corporate updates that turned the dial except for vaccine rollout delays. The delays are conveniently going to be blamed on AstraZeneca vaccine issues despite the timetable was never going to be met. Now the confidence in AstraZeneca is shot and will further delay the vaccine rollout - most likely into 2022. Just for context, even in the fantasy assumption by the government, we were never going to give the second shot of the vaccine to everyone till 2022 anyway…now it will be more like mid 2022. 

The US market volatility index fell to new 12-month low overnight and there were some big bets being taken for a market crash/panic in the next three months to pop volatility to much higher level. High valuation with low volatility and reflation risk is fraught with danger for retail investor optimism. US fund manager surveys show that they are holding historical high equities exposure and historically low cash exposure. Then add historical high growth in margin lending and buybacks…it looks like the herd is long and fells strong. Shorters are starting to set up their reflation traps. Time will tell who comes out on top…but it will get choppy.

China CPI shows the relative weak inflation pressures. Despite the strong currency, even Chinese inflation beat expectations. Reuters update on China data today…“China’s factory gate prices rose at their fastest annual pace since July 2018 in March, official data showed on Friday, as growth in the world’s second-largest economy continued to gather momentum. China’s producer price index (PPI) rose 4.4% in annual terms, the National Bureau of Statistics said in a statement. This compared with a median forecast for a 3.5% rise in a Reuters poll of analysts and a 1.7% rise in February. China’s consumer price index (CPI) rose 0.4% from a year earlier in March, the statistics bureau said in a separate statement, compared with a median forecast for a 0.3% rise in a Reuters poll and a 0.2% decline in February.”

US Producer Price Index (PPI) is the next key inflation update and that will be out tonight. The annual growth in PPI has moved from -1.50% to +2.80% over the last year. Markets are expecting this to rise even more on Friday. We expect this to keep rising over the next 3-6 months. How will the bond market react if the PPI pops by more than 4-5% in the next few months? Time will tell but the trend is clear…reflation cycle is in play. Market implied 2022 rate rise probability has reached 90% while US Fed keeps saying that they won’t raise rates for number of years.

We are seeing inflation data and inflation indicators beating expectations on a global basis while the US is also dealing with currency debasement that makes inflation worse. The gold sector has been outperforming in recent days as the market starts to appreciate the reflation cycle. 

The historical trend suggests that bond yields hit 3% in the last decade when inflation pops above 2%. What will happen when inflation moves above 3%? What if it pops above 4%? Time will tell. Everyone is looking at the bond yields fading as a sign of a weaker inflation outlook. Inflation going up is a given. Where it settles in the medium to long term is the uncertain part. Growth will pop and fade. 

The question remains: what will fade more? growth or inflation. History suggests stagflation risk is high. Just remember that in a market panic, bond yields will come down as investors run for safety. There are no simple solutions to a complex problem. The first step to fixing the problem is accepting that we have a problem. Australian Government, RBA and Regulators ran a coordinated policy setting to boost the property bubble when the economic reality was driving a property pullback. Now they are talking about potential systematic risk in property market and confidence in the banking system. 

Just for context, we are talking about banks that are being charged by regulators on a monthly basis for their decade of breaking regulations. You have to question if the property market was affordable and strong, why give handouts and remove responsible lending rules? Reality is scarier than fantasy.

Comments on US market last close… US market was up despite unexpected rise in jobless claims. NASDAQ +1.0%, RUSSELL +0.9%, S&P +0.4% and DOW +0.2%. Bond yields and USD were lower while Metals were higher and Oil lower. Gold downtrend is broken ahead of the Producer Price Index update tonight. Get ready for inflation outlook to look above 3% and that may double bond yields. Gold and Tech were the best sectors while Energy and Property were the worst. AstraZeneca is getting restricted and that's going to push back vaccines rollout plans globally. Australia is looking at 2022 and Emerging Markets are looking at 2023. Statistically speaking, we will have a double or triple variant by then that will make the vaccines invalid. Its a race against mutation to vaccinate the world and we are stumbling due to greed, politics and bad management. Geopolitics between US and China keeps rising with seven more Chinese supercomputing entities have been blacklisted by US.

Full SUNSET STRIP report with end of day market stats are on the attached link.

(VIEW LINK)

Not already a Livewire member?

Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.