Focus on the Inevitable
The currency markets were roiled, the interest rates markets were volatile but there was one constant.
Federal Reserve Chair Powell and various other Fed officials have spoken to clarify their thoughts on the latest microshift in Fed stance. The currency markets were roiled, the interest rates markets were volatile but there was one constant.
Risk assets as represented by tech stocks have continued their relentless march higher. Sure, there’s always a possibility that this is a wrong market reaction, but the trend has been going this way for months and has only been interrupted by minor though volatile corrections.
You can always try to be cute and try to fight the trend, but to be successful, it’s easier to just do what works and keep doing it till it stops. That’s what the Fed is doing. Despite a slight change in projections, they’re continuing with their money printing.
You can ignore what Powell is saying and extrapolate that minor change into something that will spook you into thinking that the end of the world is nigh. Or you can keep doing what works. What are you going to do?
Talking about Tapering but Nothing Has Changed
Federal Reserve Chair Powell’s testimony before the congressional committee yesterday showed that he remains a strong believer that the high inflation prints are due to components which he believes will prove to be transitory and do not warrant any immediate policy action from the Fed.
Quite a number of Fed speakers who have spoken this week have various points of view, but the general conclusion is that it is time to talk about tapering, but the time to taper is still some months away. Talking about tapering is good as it’s telling the market that the Fed is not asleep at the wheel. The consensus seems to be that before rate hikes begin, the Fed should at least have done a significant amount of tapering the bond purchase programmes ahead of that.
So despite the market volatility of the past week, nothing has changed except the Federal Reserve has feigned a little concern about inflation as inflation expectations were moving up a little too fast. To sum up the situation; positioning was stretched and filled with hyperbolic extrapolations of a Federal Reserve that was going to allow inflation to go wildly out of control, and when those expectations proved inaccurate, those fast-money traders abandoned the trade all at once. The gravy train continues and risk assets will continue to rise.
PMIs (An index of the prevailing direction of economic trends in the manufacturing and service sectors. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.) galore in the day ahead for Europe and the US. Risk will be driven by Dollar strength and US interest rates in reaction to the incoming data.
Keep short USD and long NZD, & CNH. Reduced positions but looking to add once stability is restored. Remain short USD vs NZD & CNH.
LTGmembers. : On the charts, USDCAD has failed to hold above the daily Ichimoku cloud, we will be looking for opportunities to sell this pair in the days ahead.
2. Commodities: Uranium — Fundamentals remain intact. Stay long and weather the storm
Key risks: Higher US yields that will lead to a strong USD.
Equity Index: Long Nasdaq futures. Support is at 12,950–13,000. New highs yet again. Stay long and patient while looking for substantial dips to buy.
Single Stocks: Retracement in energy stocks is a short-term blip in a long-term trend. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields due to inflation fears and geopolitical worries are the key risks.
WHAT HAPPENED YESTERDAY
- Fed Chair Powell didn’t really provide any new information on monetary policy and instead spoke optimistically about the economic outlook. He said factors that have weighed on the labour market and that have contributed to increased levels of inflation should both be transitory. In addition, Powell said he thinks there will be strong job creation this fall.
- The U.S. Dollar Index decreased -0.2% to 91.75. Dollar held at lower levels on Tuesday after Federal Reserve Chair Jerome Powell reaffirmed the U.S. central bank’s intent to encourage a “broad and inclusive” recovery of the job market, and not to raise interest rates too quickly based only on the fear of coming inflation. “We will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said in a hearing before a U.S. House of Representatives panel.
- U.S. Treasuries settled slightly higher, pushing yields lower. US 2-year Treasury Bond yield decreased 2 basis points to 0.25%, and the 10-yr yield decreased 2 basis points to 1.48%.
- S&P 500 gained +0.5% on Tuesday in a session that featured leadership from the growth stocks amid soothing words from Fed Chair Powell’s congressional testimony . The Nasdaq (+0.9%) outperformed and set intraday and closing record highs. The Dow Jones Industrial Average increased +0.2%, and the Russell 2000 increased +0.4%.
- Apple (AAPL 133.98, +1.68, +1.3%), Microsoft (MSFT 265.51, +2.88, +1.1%), Facebook (FB 339.03, +6.74, +2.0%), and NVIDIA (NVDA 755.47, +18.38, +2.5%) rose more than 1.0%. The Vanguard Mega Cap Growth ETF (MGK 227.92, +2.34, +1.0%) increased 1.0%.
- Bitcoin recovered from a five-month low on Tuesday in a volatile session in which it fell below $30,000, extending losses sparked a day earlier when China’s central bank deepened a crackdown on cryptocurrencies. It was last at $32,599, up +2.95% on the day.
HEADLINES & MARKET IMPACT
Notable Snippet: “We will not just look at the headline numbers for unemployment,” Powell told the members of the House Select Subcommittee on the Coronavirus Crisis. “We will look at all kinds of measures … That is the most important thing we can do” to ensure the benefits of the recovery are more fully shared.
Powell told reporters the economy “is still a ways off” from the progress in rehiring that the Fed has said it wants to see before making any changes, a cue that the timing of an actual policy shift remains up in the air.
THEMATIC CONTEXT: “The fact that both US Treasury Bonds and Markets sold off concurrently on the higher inflation print exposes the weak underbelly of the acute US twin deficit situation (as foreigners are no longer financing US debt) and how cornered the Fed is. If the US does not go into “QE Infinity” (i.e. weakening the USD in the process) to bring rates under control (by printing money to buy US debt), they will be sacrificing the US economy which will inadvertently lead to an unsustainable debt load which threatens to cripple the system. The writing is on the wall and the path is clear. The Fed and Government has made it clear that they will sacrifice the USD to save the economy via unlimited fiscal policy coupled with accommodative monetary policy so that inflation will eventually outpace debt. A classic playbook used by the US post World War 2. We suspect that any sustained selloff will be met with a swift response, the cavalry will arrive “ — 13th May 2021
Notable Snippet: Republicans in the narrowly divided U.S. Senate on Tuesday blocked an election reform bill considered a top priority by Democrats seeking to offset a wave of laws passed by Republican-led state legislatures that impose new limits on voting. The 50–50 party-line vote fell short of the 60-vote threshold to advance most legislation in the Senate, sparking new calls by some Democrats to rethink that rule, known as the filibuster.
THEMATIC CONTEXT: “Biden will have to get his best policies through before the midterm elections (Nov 8 2022) as any new seats won by Republicans (more fiscally conservative) will result in perpetual policy gridlocks, a key risk to our sustained inflation trajectory. We suspect the Biden Administration will pull through and weaknesses in materials and especially energy is an opportunity to get in.” — 22nd June 2021
Notable Snippet: Once Democrats have a majority on the board, they are expected to move quickly to undo a slew of Trump-era precedents seen as favouring businesses over unions. Biden backs legal changes to make it easier for workers to organize and join unions. On Monday, Vice President Kamala Harris said the Biden administration “will probably be the most pro-union of any we’ve seen before.”
Those include major Trump-era rulings that made it easier for employers to defend workplace rules; barring union organizers and off-duty employees from engaging in organizing activities on employers’ property; giving businesses more power to make unilateral changes to working conditions and prohibiting workers from using company email for union organizing.
THEMATIC CONTEXT: “We suspect that inflation is going to be anything but transitory in the longer term as the trajectory of domestic and geopolitical policies are not in the interests of lowering costs through globalization, but one of protectionism and instigation to form new alliances. We have 1. Reshoring of supply chains and building up of strategic reserves, 2. Return of the Labour Union in America, 3. Unlimited Fiscal spending fuelled by the Sputnik Moment in tech and 4. Rise of economic factions that are not in sync with a US led unipolar world.” — 17th May 2021
“This is a microshift in America’s labour market, yet a very important one. The rise of the labour union tells us that Biden will subjugate the Dollar to save the American Middle-Class, and we should not bet against that. Dollar weakness is here to stay.” — 4th June 2021
Phan Vee Leung
CIO & Founder, TrackRecord