Is Fed’s tapering imminent?
Signs that US economic recovery may be plateauing and easing off are starting to appear.
We are starting to see comments from both proponents and opponents of tapering on the Federal Reserve committee. The comments will lead to short term volatility as the market digests each piece of information as they come.
However, the decision will ultimately rest on the evolution of economic data (especially jobs and inflation data). Signs that US economic recovery may be plateauing and easing off are starting to appear. The race to get Biden’s massive infrastructure spending plan to provide the next boost to the economic recovery is afoot.
Fed Chair Powell has promised that the process towards tapering will be very transparent, and this is why Fedspeakers are being vocal about their conflicting opinions. This is the discussion going on in real-time.
Print The Money Or Trigger The Revolution
U.S. Treasury Secretary Janet Yellen on Monday took additional steps to preserve the federal government’s borrowing capacity under a reinstated debt limit, suspending some investments in government employee retirement and health benefits funds.
No one is more short USDs than the US government itself due to lack of foreign buyers and this also means that no one is a larger bag holder of US’ obligations than itself as well. This creates some easy deductive reasoning when it comes to US monetary and fiscal policy. Instead of trying to find sources of revenue to make up for the deficit spending, the much easier option will be to increase Federal stimulus and the Delta variant will provide great political cover for such a move this time (we suspect that is what they will do). If the US does that, it will be another round of tailwind for assets and the money printing will continue unabated. Why stop now?
AUD: With the major cities in lockdown, RBA (Tue) may have to walk back on its plan announced at the previous policy meeting to trim asset purchases. With China data slowing down and heightened economic uncertainty, the RBA is likely to strike a dovish tone.
Keep short USD and long NZD, & CNH. The longer that USDCNH remains below 6.50–6.51, the more likely it is to start grinding lower.
Key resistance/support levels — USDCNH 6.53–54. Stay patient, and sell on rallies.
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. Stay the course.. Stay long and patient. Look to buy dips on approach of support levels at 13950–14000.
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 US July ISM Manufacturing Index was 59.5% (expected 60.8%), down from 60.6% in June. A number above 50.0% is indicative of expansion. July marked the 14th straight month of expansion for the manufacturing sector, albeit at a slightly slower pace than what was seen in June. Manufacturers and suppliers continue to struggle to meet increasing demand levels due to a range of factors that includes record-long raw material lead times, shortages of basic materials, transportation difficulties, worker absenteeism, and difficulty filling positions.
- The U.S. Dollar Index decreased -0.1% to 92.07 on a relatively quiet day in the FX markets. Emerging market currencies with high carry (interest rates) did well with TRY and ZAR making gains of almost 1% against the USD.
- US 2-year Treasury Bond yield decreased 2 basis points to 0.17% and 10-yr yield decreased 4 basis points to 1.20% as the bond markets start to consider that the economic recovery may have peaked for now.
- S&P 500 (-0.2%), Nasdaq (+0.1%), and Dow Jones Industrial Average (-0.3%) closed mixed and little changed on Monday, with risk sentiment pressured by a noticeable decline in long-term interest rates, as some speculators are taking that as a sign of risk aversion. The Russell 2000 lost -0.5% after being up +1.4% in early action, while the large-cap indices were up as much as +0.6–0.7% intraday.
- The positive start was attributed to several factors: new inflows on the first trading day of the month; the Senate finalized the text of the $1 trillion bipartisan infrastructure bill; Square (SQ 272.38, +25.12, +10.2%) announced a $29 billion, all-stock acquisition of Australian company Afterpay; and July manufacturing activity in Asia and Europe remained in expansionary territory.
- Separately, Tesla (TSLA 709.67, +22.57, +3.3%) was initiated with an Outperform rating at KGI Securities while Pfizer (PFE 43.96, +1.15, +2.7%) hit a 52-week high on news that its COVID-19 vaccine could receive full FDA approval as soon as next month.
- A state owned newspaper published an article saying that China may soon have a crackdown on online gaming due to its addictive nature especially on youths. Tencent the top mobile gaming leader in China was down 10% early in the trading session on the back of the fear that China’s clampdown on companies continues.
HEADLINES & MARKET IMPACT
Notable Snippet: China’s government quietly issued new procurement guidelines in May that require up to 100% local content on hundreds of items including X-ray machines and magnetic resonance imaging equipment, erecting fresh barriers for foreign suppliers, three U.S.-based sources told Reuters.
Document 551 was issued on May 14 by the Chinese Ministry of Finance and the Ministry of Industry and Information Technology (MIIT), with the title, “Auditing guidelines for government procurement of imported products,” said one former U.S. government official, who obtained a copy of the previously unreported 70-page catalog and read portions to Reuters, but requested anonymity.
THEMATIC CONTEXT: “China is focused on a strategy known as “dual circulation,” under which China is seeking to drastically boost the domestic consumer market to ensure long-term sustainable growth free from foreign risks, ranging from COVID-19 to trade wars. And it also appears that recent bond index changes (FTSE Russell said it will add Chinese government bonds to its flagship World Government Bond Index from October next year. That will be China’s third entry into a major global bond index and comes at a time when investors are hunting for yield in an environment of ultra-low interest rates) are likely to drive continued increased capital flows to China that all else equal would likely help the goal of bolstering the Chinese consumer.” — 4th Nov 2020
COMMENTS/IMPACT: China is evidently trying to wean itself off of foreign risks and Xi’s dual-circulation playbook is getting underway. We believe that this will make the CNH more resilient in the long run and it’s a structurally good thing for the currency.
Notable Snippet: The U.S. states of Florida and Louisiana were at or near their highest hospitalization numbers of the coronavirus pandemic on Monday, driven by the still-spreading Delta variant, as one doctor warned of the “darkest days” yet.
More than 10,000 patients were hospitalized in Florida as of Sunday, surpassing that state’s record. Louisiana was expected to break its record within 24 hours, prompting Governor John Bel Edwards, a Democrat, to order residents to wear masks again indoors.
THEMATIC CONTEXT: “Measures taken by countries on a Macro level will impact already sensitive social sentiment and we suspect that as Delta variant spreads, this will be the worst time for central banks and governments to talk about talking about tightening credit conditions. In fact, we have been banging the table that the entire credit tightening situation is a farce and merely showboating. The time to unveil the actual show is here and we suspect that assets will resume its trajectory in time.” — 19th July 2021
COMMENTS/IMPACT: This is a development to watch. The saving grace this time around is that the mortality rate with regards to the Delta variant is much lower.
Notable Snippet: The Delta variant poses new risks for the world’s second-biggest economy as it spreads from the coast to China’s inland cities and presents fresh challenges to authorities who have for months managed to avert any widespread outbreak of the coronavirus. China’s overall economy is not invulnerable. It grew more slowly than expected in April-June, due to persistently high raw material prices, cautious consumer spending and a subdued real estate market.
THEMATIC CONTEXT: “Is this a sign of things to come? We suspect that the Delta variant will prove to be a challenge in the coming weeks, although most developed world countries at this point in time are fighting this from a better vantage point due to vaccine efficacy and better response policies. This is a development to monitor closely and any changes will affect Cyclicals and Energy to a reasonable degree.” — 19th July 2021
“This is a development to watch as China is usually the canary in the coal mine. Their policy response is indicative of how other countries will react to the Delta variant and we will be keeping a close eye. In Singapore (one of the leading benchmarks as well), a heartening development is the progress towards recognizing Covid as an endemic as vaccination rates increase. As a result of vaccines, we suspect that the world is in a much better place this time around to combat the virus and any knee jerk outlier sell offs will present good opportunities to get into long term structural positions.” — 2nd Aug 2021
COMMENTS/IMPACT: China is the canary in the coal mine and we should watch their development with regards to Delta closely.
Phan Vee Leung
CIO & Founder, TrackRecord