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What will the Final Quarter bring?

The final quarter of the year starts with the stock markets and bond markets on the backfoot

The final quarter of the year starts with the stock markets and bond markets on the backfoot. However, when the dust settles, asset managers will still be faced with the prospect of having to invest money that they have cashed out, in an environment where the Federal Reserve continues to print more money relentlessly.

With China on holiday for their Golden week, the Evergrande situation will fade out of the headlines for now, and President Biden’s attempts to get his spending bills passed will be the focal point of markets for now.

Market Observation

Cryptos are here to stay

Regulators in the more developed western regions are beginning to welcome cryptocurrencies as a mainstream asset class.Switzerland’s first ever approval of a bitcoin and cryptocurrency investment fund and Powell statement that Bitcoin will not be banned are just a few interesting developments in the right direction of mainstream adoption.

With regulators in the fray, traditional investors will likely (and finally) see crypto in a different light and finally learn to embrace it. Ultimately, this will push us further up the adoption curve, drawing us closer to the targets we mentioned in our Bitcoin webinars earlier this year.

DAY AHEAD

A slew of PMIs from various regions (EU, Canada and US)) will be released today. Of importance today will be the release of the US PCE Price Index data which is the Fed’s preferred tool to measure inflation. A lower than expected price pressure will likely ease tapering concerns and allow risk assets to grind higher after this week’s correction.

TRADING PLAN

1. Currencies:

Keep short USD and long NZD, & CNH. The USD is finally taking a breather.

2. Commodities: Uranium & Energy — Stay the course.

Key risks: The US debt ceiling, higher US bond yields, the Evergrande situation and Fedspeakers’ thoughts on the tapering process.

3. Equities:

Equity Index: Long Nasdaq futures. Trades weak, but a correction is to expected after a long rally.

Single Stocks: The TrackRecord Model Portfolio staged a recovery despite the overall weakness of the market. Price action is positive especially in light of weakness in the broader market.

Key risks : The US debt ceiling, higher US bond yields, Evergrande situation and Fedspeakers on the tapering process in the days ahead.

WHAT HAPPENED YESTERDAY

Market movement as of New York Close 30Sep 2021
  • US Initial jobless claims for the week ending September 25 increased by 11,000 to 362,000 (expected 340,000). Continuing claims for the week ending September 18 decreased by 18,000 to 2.802 million. The higher than expected initial jobless claims may dampen hopes of a recovery as a result of economic reopening.
  • The third estimate for Q2 GDP checked in at 6.7% (expected 6.7%) versus the second estimate of 6.6%. The GDP Deflator was unchanged at 6.1% (expected 6.1%). The report is dated (released on the last day of the third quarter), and the lack of any meaningful change from the second estimate, have robbed it of any market-moving influence.
  • President Joe Biden’s agenda faced a key test on Thursday among fellow Democrats as the House of Representatives prepared a vote on a $1 trillion infrastructure bill that progressives have threatened to block unless there is also a deal on a larger social spending plan. That vote was to come just hours after Congress wrestled Washington back from the brink of a government shutdown by voting to continue funding the government through Dec. 3.
    The House approved the measure in a bipartisan 254–175 vote, hours after it passed the Senate 65–35. The White House said Biden quickly signed the measure behind closed doors before funding was to run out at midnight. With that hurdle overcome, Biden and House Speaker Nancy Pelosi scrambled to piece together a vote in order to go forward with the infrastructure plan that has already passed the Senate with bipartisan support.
  • The U.S. Dollar Index decreased -0.45% to 94.34 despite the weakness of the stock market. For now, the USD seems to be tracking the US bond yields closely.
  • The 10-year Treasury Bond yield decreased 3 basis points to 1.52% while the 2-yr yield fell 2 basis points to 0.28%.
  • S&P 500 fell -1.19% on Thursday and closed at session lows in a volatile session to end the third quarter. The Dow Jones Industrial Average declined -1.59%, the Russell 2000 declined -0.9%, and the Nasdaq declined -0.43%.
  • The broader market struggled as investors had to contend with some softening economic data, disappointing earnings news, continued uncertainty on infrastructure, and even some quarter-end machinations. The Invesco S&P 500 Equal Weight ETF (RSP 149.82, -2.51, -1.7%) declined 1.7%.

HEADLINES & MARKET IMPACT

Biden prepares to scale back lofty goals as signature spending plan under threat

Notable Snippet: President Joe Biden and his senior Democratic allies in Congress are preparing to lower their ambitions for a signature legislative achievement on their top social priorities. Faced with increasingly stiff odds of passing their $3.5 trillion social-spending proposal, Biden and his aides are trying to suss out what narrower proposal could unite an ideologically fractured Democratic caucus of lawmakers, according to people familiar with the matter.

Biden regards his “Build Back Better” agenda, including spending more on healthcare, education and climate change, as key to his legacy and to securing victory for Democrats in the coming midterm elections and beyond.

Thematic Context: “This fiasco will take center stage in the weeks ahead and be driving risk appetite. We should keep an eye on any microshifts in developments. One crucial thing to note is the microfractures appearing within the Democrats. If this gets worse, it may be bad for risk sentiment as markets are betting on the Democrats ability to rely on bipartisanship when the going gets tough, but if that option is at risk, we suspect markets will correct further.” — 30th Sep 2021

COMMENTS/IMPACT: As we have pointed out and MSM (mainstream media) is starting to pick up, the microfractures within the Democrats may be an issue because market euphoria was dependent on Biden’s unlimited fiscal policy. Although the “watered down” version is still large, we suspect the weeks ahead will be rife with volatility as expectations will be adjusted and this is just the beginning.

China power crunch slams factories as coal lobby warns woes could stay until winter

Notable Snippet: Small firms caught in China’s prolonged energy crunch are turning to diesel generators, or simply shutting shop, as coal industry officials voiced fears about stockpiles ahead of winter and manufacturing shrank in the world’s no. 2 economy.

Beijing is scrambling to deliver more coal to utilities to restore supply as the northeast grapples with its worst power outages in years, particularly the three provinces of Liaoning, Heilongjiang and Jilin, home to nearly 100 million people.

Thematic Context: “This is the real elephant in the room for China, a power supply crunch will have a material impact on GDP and growth on China as opposed to the Evergrande situation and we should be alert to the developing situation. We have been heavily positioned in energy and warning about this acute problem since 2020, it seems that things are playing out as projected. Hold onto your hats as traditional energy will be back in vogue.” — 28th Sept 2021

COMMENTS/IMPACT:

source: bloomberg terminal 30th Oct 2021 11:02am EST.

Need we say more? We have been covering this development for the longest time and events are unravelling as predicted. China (also happens to be the largest consumer and importer of energy) will not risk social stability just because of some fairy tail ESG mandates and will keep bidding this energy market higher. The icing on the cake is that global economies have not fully opened up and we are not even seeing peak demand. Imagine the implications for energy when the global economy is fully restored.

China hikes 2021 rare earth quotas by 20% to record highs

Notable Snippet: China hiked its annual rare earth output quotas on Thursday by 20% year-on-year to their highest levels on record, as it seeks to ease tight supply for manufacturers.

A statement from the Ministry of Industry and Information Technology said the 2021 rare earth mining output had been set at 168,000 tonnes, up from 140,000 last year. The quota for smelting and separation — or processing of rare earths into a form that can be used by manufacturers — is 162,000 tonnes, also up 20% on the year, the statement showed.

Thematic Context: “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

COMMENTS/IMPACT: We remain cognizant of the developments in potential supply side inflation shocks.

SENTIMENT

FX

STOCK INDICES

Phan Vee Leung
CIO & Founder, TrackRecord

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