How will the market react to the inflation print?
The market is now used to seeing inflation prints that are higher than expected…
The market is now used to seeing inflation prints that are higher than expected and the Federal Reserve has been very insistent in sticking to their thesis that high inflation prints are transitory. As such, upside surprises are now par for the course, and unless it’s a huge surprise, any market reaction will likely be tepid.
However, a downside surprise will confirm the Fed’s stance that there really isn’t any reason to act preemptively on high inflation prints and that it pays to remain patient till substantial progress is made on both the inflation and employment fronts before doing any tapering of ultra-easy monetary policies.
Given this situation where bad news isn’t really bad because it’s only transitory and good news is great news, the path of least resistance for risk assets is clear. We are in an environment where risk sentiment is strong and it’s likely to remain this way for some time.
China May Be Approaching End Of Tightening Cycle
China goes through these cycles of “bulking and cutting” and right now they’re in a “cutting” phase. China’s GDP is still growing but the credit layer on top of that GDP growth is decelerating. That’s common every few years.
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!
US CPI release tonight will give the market an idea if the Federal Reserve’s narrative of transitory inflation is coming to fruition. A weaker than expected will be risk positive as the market is now used to upside surprises on the inflation front.
Keep short USD and long NZD, & CNH. Remain short USD vs NZD & CNH.
2. Commodities: Uranium — Fundamentals remain intact. Stay long and patient.
Key risks: Higher US yields that will lead to a strong USD.
Equity Index: Long Nasdaq futures. Dips approaching 13,950–14,000 should be good opportunities to add to longs. Stay long and patient while looking for substantial dips to buy.
Single Stocks: Stocks continue to grind higher. 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
- The U.S. Dollar Index increased +0.1% to 92.23. Dollar climbed across the board on Monday as concerns about the pandemic encouraged investors to seek a safe haven, and as they awaited more clues about the global economic recovery. With markets hyper-sensitive to any talk of early tapering, U.S. inflation data on Tuesday will be closely watched ahead of testimony by Federal Reserve Chair Jerome Powell on Wednesday and Thursday.
- US 10-year Treasury Bond yield settled 1 basis point higher at 1.38%, and the 2-yr yield remained unchanged at 0.23% after touching 0.20% overnight. On a related note, the $58 bln 3-yr note auction was met with lukewarm demand while the $38 bln 10-yr auction received strong interest.
- S&P 500 (+0.4%), Nasdaq (+0.2%), and Dow Jones Industrial Average (+0.4%) closed at record highs on Monday, recording modest gains as investors remained committed to the market ahead of a busy week of events. The S&P 500 also set an all-time intraday high while the Russell 2000 increased just +0.1%.
HEADLINES & MARKET IMPACT
Notable Snippet: European Union foreign ministers agreed on Monday to launch a global infrastructure plan linking Europe to the world, its latest step after deals with India and Japan and a similar pledge by the Group of Seven richest democracies. Suspicious of Chinese President Xi Jinping’s Belt and Road Initiative to link Europe to Asia via infrastructure in a bid for greater influence, the EU set out a formal path for an ambitious “connectivity” plan from 2022.
“We see China using economic and financial means to increase its political influence everywhere in the world. It’s useless moaning about this, we must offer alternatives,” German Foreign Minister Heiko Maas told reporters at a meeting with his EU counterparts in Brussels. “It is important that the European Union … coordinates them very closely with the United States,” he said.
THEMATIC CONTEXT: “The West needs to protect its own interest in an increasingly multi-polar world and we believe that we will see more of such infrastructure deals and building between these countries. In addition, the effect of supply chain deals are not just siloed between the two parties but beneficiaries also extend to those who are reliant on the network, increasing the value of localized companies and businesses for those who will take the effort to look deeper into domestic issues.” — 23rd Mar 2021
“As we move into an increasingly multi-polar world, the reshoring of supply chains, logistics and manufacturing will be mega projects governments around the world will be working on and this will be funded by unlimited fiscal spending. In addition, domestic costs tend to be more expensive, feeding into our trajectory of high and sustained inflation in time to come.” — 3rd May 2021
“Supply chain issues are not a quick fix. Lots of investments will be required to successfully reshore capacities and build up a sustainable and reliable economic faction with partners. This has to be a concerted effort backed by free flowing fiscal stimulus by countries. We suspect we are entering an inflationary decade in absolute terms and there is little to suggest otherwise. Cash is trash as inflation is a tax on savings.” — 5th July 2021
“Yesterday it was France and today, Germany. This is a recurring theme and the only way out is through building supply chains, new economic factions and reindustrialization of domestic economies. All these require a humongous amount of fiscal stimulus and we suspect that western governments will respond as we are in the era of a great power competition where the cost of losing is a matter of national security.” — 6th July 2021
Notable Snippet: China’s Ministry of Industry and Information Technology said on Monday it has issued a draft three-year action plan to develop the country’s cyber-security industry, estimating the sector may be worth more than 250 billion yuan ($38.6 billion) by 2023. The draft comes as Chinese authorities step up efforts to draft regulations to better govern data storage, data transfer, and personal data privacy.
THEMATIC CONTEXT: “We are in an era of great power competition and no amount is too much as economic factions backed by sovereign printing presses are in it to win it. We haven’t even officially begun and commodity prices are already spiking on the back of supply chain issues. We believe that we will see much higher commodity prices in time to come and are invested accordingly.” — 14th June 2021
Notable Snippet: China’s antitrust regulator is set to order the music streaming arm of Tencent Holdings Ltd (0700.HK) to give up exclusive rights to music labels which it has used to compete with smaller rivals, two people with knowledge of the matter said on Monday. The State Administration of Market Regulation (SAMR) will also fine it 500,000 yuan ($77,150) for lapses in reporting the acquisitions of apps Kuwo and Kugou, the people told Reuters — a milder penalty than the forced sale indicated earlier this year.
THEMATIC CONTEXT: “China has been systematically cracking down on Tech and social subcultures that pose a threat to the CCP’s authoritarian rule. We believe that the LGBT movement is an antithesis to the party’s ethos of complete control, because it represents liberalisation and freedom of expression. These innuendos may flow into mainstream culture and that will be a problem for the CCP in the long run. We believe there is a possibility that China is exerting their control as they mark the Party’s 100th year anniversary, and the fair valuation for Chinese companies will resume in the months ahead.” — 8th July 2021
Phan Vee Leung
CIO & Founder, TrackRecord