Do you really want to fight the Fed?
It truly doesn’t pay to fight the Fed, and the message from Fed Chair Powell yesterday was as clear as it can be.
It truly doesn’t pay to fight the Fed, and the message from Fed Chair Powell yesterday was as clear as it can be. Inflation remains transitory, and substantial progress to achieving full employment is nowhere close.
It’ll take a few months to be sure if substantial progress is made, and the process towards actually tapering will be gradual. The Fed will be very transparent and telegraph their intentions well ahead of time to avoid surprising the market.
On another note, the fact that China’s securities regulator convened a virtual meeting with major investment banks, including a few foreign ones, to reassure them that the crackdown on education firms is targeted and not intended to hurt other sectors is telling. Any panic selling in the broader market will be met with support from the government as a collapsing market is not something that they want.
Given the Fed’s message, risk assets remain firmly on the path to higher levels.
Will Rent Take The Inflation Baton?
Zillow has an “Observed Rent Index” and it jumped nearly 2% month over month in June and is running at 7% YoY. At this point in time, American Household balance sheets have never been stronger and wage gains have started to take hold which helps people afford higher rents. Couple that with limited supply of housing stock in general and you get higher rents which is a big chunk of inflation statistics in time.
Notable releases for the day will be US Advance GDP q/q which is expected to come in at +8.5% and the Fed’s preferred measure of inflation, the PCE index. Risk will continue to be driven by tech earnings and Chinese equity rout/recovery.
On the US corporate earnings front, tech giant Amazon reports after market close.
Keep short USD and long NZD, & CNH. USDCNH broke above resistance levels at 6.50–51 due to the rout in the Chinese stock market but that did not last long. News that the Chinese policymakers were trying to reassure the market that their clampdown on education companies does signify a clampdown on the broader market soothed jittery investors. A comfortingly dovish Fed helped USDCNH break below 6.50–51 again.
2. Commodities: Uranium & Energy — Stay the course. .
Key risks: Spread of the delta strain and also the rout in Chinese stocks due to clampdowns from the central government are the key drivers of risk sentiment for now.
Equity Index: Long Nasdaq futures. The Fed was dovish, and the long term picture remains extremely positive given the strong earnings beat by the tech giants. Stay long and patient. Approach of support levels at 13950–14000 will be a good opportunity to add to longs.
Single Stocks: Every dip is a chance to get involved. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Spread of the delta strain, geopolitical worries and China’s crackdown on various sectors will dictate the market risk sentiment for now.
WHAT HAPPENED YESTERDAY
- The Fed made no policy changes (expected), leaving the target range for the fed funds rate near zero and the pace of asset purchases at $120 billion per month. Fed Chair Powell reiterated expectations for inflation to moderate and said that substantial further progress towards the Fed’s employment goal is still “some ways away”. The Fed will remain extremely accommodative and will continue to watch the incoming data, presumably at least a few more employment reports, until it decides to start tapering asset purchases. This dovish tilt boded well for risk assets.
- The U.S. Dollar Index decreased -0.2% to 92.26. GBP was up +0.15% at 1.3904, holding near a two-week high, with analysts attributing its firm tone to COVID-19 cases in Britain declining over the past seven days. CNH pulled away from three-month lows hit on Tuesday, when it experienced its biggest daily losses since October, after the country’s stock market stabilized following a bruising couple of days.
- US 2-year Treasury Bond yield was unchanged at 0.20%, and the 10-yr yield increased 1 basis points to 1.26%.
- Large-cap indices closed mixed on Wednesday, as the market digested mixed earnings reactions in high-profile names and a policy announcement from the Fed that was largely in-line with expectations. Small-cap and micro-cap stocks saw the biggest gains.
- The S&P 500 (unch) closed flat while the Dow Jones Industrial Average decreased -0.4%. The Nasdaq outperformed with a +0.7% gain but noticeably trailed the Russell 2000 (+1.5%) and iShares Micro-Cap ETF (IWC 144.42, +2.40, +1.7%).
- Apple (AAPL 144.98, -1.79, -1.2%), Microsoft (MSFT 286.22, -0.32, -0.1%), and Alphabet (GOOG 2721.88, +8.33, +3%) headlined the earnings calendar and came through with record-setting quarters. The negative reaction by Apple’s stock is due to warning of headwinds in the next quarter due to semiconductor chip shortage. Facebook beats earnings expectations, but warns of significant growth slowdown. Facebook shares fell as much as -5% in extended trading on Wednesday after the social media company called for revenue growth to slow in the quarters ahead, even as second-quarter results came in ahead of estimates.
- China’s securities regulator convened a virtual meeting with executives of major investment banks on Wednesday night, attempting to ease market fears about Beijing’s crackdown on the private education industry. Chinese authorities have become uncomfortable with a sell-off that sent the nation’s key stock indexes to the brink of a bear market on Wednesday morning.
HEADLINES & MARKET IMPACT
Notable Snippet: A roughly $1 trillion bipartisan infrastructure investment bill advanced in the U.S. Senate on Wednesday, passing a key milestone that moves the emerging legislation toward formal debate and possible passage. The Senate voted 67–32 to take the first procedural step toward debating the measure that has the support of Democratic President Joe Biden.
THEMATIC CONTEXT: “When push comes to shove, we believe that the US government will do the right thing and they are on the edge of unleashing unprecedented fiscal money. We have been saying that Biden’s best work has to be accomplished from now to midterm elections and each day later just coils the springs of explosive growth as he will have to go faster and more aggressively within a shorter period of time. Don’t miss the forest for the trees at this point in the cycle.” — 21st July 2021
Notable Snippet: A Chinese state-owned securities newspaper urged calm on Wednesday after investors dumped mainland shares for a second day on worries over the impact of tighter government regulations. Regulatory moves aimed at the education, property and technology sectors sparked heavy selling this week in Chinese markets, and have left global investors bruised and uncertain over the outlook for investments in Chinese firms.
In a front page commentary on Wednesday, the state-owned Securities Times said that systemic risks “do not exist in the A-share market overall.” “The macroeconomy is still in a steady rebound stage, and short-term fluctuations do not change the long-term positive outlook for A-shares,” the commentary said.
THEMATIC CONTEXT: “As we approach the final ⅓ of the Chinese credit cycle, China’s recent actions (RRR Cut) and confluence of events (China’s Cybersecurity ambitions and end of CCP’s 100th year anniversary) are indicative of a good probability that they are coming to the tail end of their credit tightening and we can expect more liquidity to be unleashed as China ramps up its “Great Power Competition” efforts.
Much investments are needed in Tech and Infrastructure as Western economies are starting to get in stride. This is exciting because post China’s entry into the WTO organization in 2002, Chinese credit was what largely drove risk-appetite, with China back on the table and the US firing at full throttle, the liquidity bazooka will be unprecedented. Hold on to your hats!” — 13th July 2021
“It may appear ironic that China is so adamant about Data Protection and Privacy, but one thing China is good at is shaping and steering the “narrative”. The CCP is one ruling party that is not afraid of taking the bitter pill as long as it will shore up power and lay the groundwork for a stronger government in the future, we must understand that they aim to be the “perpetual rulers” of the Dynasty and don’t think in fixed term limits of election cycles. China knows that the Data is the new “Oil” and having the Rule of Law in the realm will set it up to be a prime destination for the new age, China’s Tech Companies are not TBTF (Too Big To Fail), but the CCP is and that is all we need to realize. Culturally, the Chinese are all about a beautiful facade and that is what is being moulded.” — 27th July 2021
Notable Snippet: China’s new ambassador to Washington, Qin Gang, on Wednesday wished the United States victory against COVID-19 and said great potential awaited bilateral relations, striking an optimistic tone as he arrived at his new post amid deeply strained ties. Qin’s arrival comes days after high-level talks in the northern Chinese city of Tianjin between U.S. Deputy Secretary of State Wendy Sherman and senior Chinese diplomats ended with both sides signaling that the other must make concessions for ties to improve.
Phan Vee Leung
CIO & Founder, TrackRecord