Why did the market bounce?
As always, focus on the longer term inevitable outcomes
No obvious reason for the reason. As we pointed out yesterday, the global outage of all the social media platforms that Facebook Inc owns will not have a lasting impact on the market.
All the bad news of higher energy prices and inflation fears remain. So it’s really just a matter of people now getting used to the fear and that soon they will realise that it doesn’t really make much of a dent on the bottom line of the tech companies that have dominant business models.
As always, focus on the longer term inevitable outcomes and fade the noise generated by the fickle-minded crowd.
Why is it okay to buy “expensive” assets?
People generally have a tendency to buy things when it is cheaper to fulfil their perceived notion of obtaining an object of a higher value for cheap. While this motivation also drives people when investing, people often have the wrong concept for cheap when it comes to buying risk assets.
To most, the asset will only be cheap when they have seen it come off the highs as they see the highs as a potential trajectory of the asset price. However, assets can be cheap when they are at the highs too if the macro picture and fundamentals does indeed spell for much higher prices in the future.
US ADP Employment change will be released today but the correlation of this number with the more important data point, US Non-Farm Payrolls, on Friday is not that great. Market impact is likely to be limited as market awaits the more watched employment statistic later in the week.
Keep short USD and long NZD, & CNH. FX remains stuck in the range.
2. Commodities: Uranium & Energy — Energy shortage, supply constraints. Stay invested.
Key risks: The US debt ceiling, higher US bond yields, the Evergrande situation and Fedspeakers’ thoughts on the tapering process.
Equity Index: Long Nasdaq futures. A small bounce and the story remains the same.
Single Stocks: The TrackRecord Model Portfolio picks remain robust and look for dips to get in.
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
- US ISM Non-Manufacturing Index for September increased to 61.9% (expected 60.0%) from 61.7% in August. The dividing line between expansion and contraction is 50.0%. The September reading marks the sixteenth straight month of growth for the services sector. Services sector activity is still running strong in spite of a broad-based industry acknowledgment that services activity is being constrained by labour shortages, logistics problems, and difficulty in obtaining supplies.
- The US August Trade Balance report was worse than expected. It showed a widening in the trade deficit to $73.3 billion (expected $71.0 billion) from a downwardly revised $70.3 billion (from $70.1 billion) in July. The widening in the deficit was the result of imports being $3.0 billion more than exports in August. The report captured the growth constraints of the semiconductor supply shortage and some of the dampening effects of the Delta variant as exports and imports of automotive vehicles and parts both decreased along with exports to China.
- The U.S. Dollar Index increased +0.23% to 93.99. The RBA decided to continue purchasing $4 billion of government securities a week until at least mid-February next year and maintained the 0.1% (expected) target for Australian government bonds. RBA governor Philip Lowe reiterated the official cash rate would stay at 0.1% until 2024 at the earliest, unless conditions cause the level of inflation to rise sustainably above the central bank’s 2–3 per cent inflation range before then. WTI crude futures settled close to $79 per barrel ($78.97, +1.28, +1.7%). Natural gas futures rose +8.6% to $6.26/MMBtu.
- The 10-yr yield rose 5 basis points to 1.54% while the 2-yr yield increased 1 basis point to 0.28%.
- S&P 500 rose +1.05% on this Turnaround Tuesday session, as the mega-cap stocks mechanically bounced back from recent losses. The market was broadly up with the Dow Jones Industrial Average (+0.92%) and Nasdaq (+1.4%) rising as well, while the Russell 2000 increased just +0.5%.
- In other news, Facebook (FB 332.96, +6.73, +2.1%) shares recouped some losses after the global outage and the whistleblower’s congressional testimony. PepsiCo (PEP 151.09, +0.89, +0.6%) reported better-than-expected earnings results and raised its FY21 organic revenue growth guidance.
HEADLINES & MARKET IMPACT
Notable Snippet: President Joe Biden said on Tuesday that his Democrats might make an exception to a U.S. Senate rule to allow them to extend the government’s borrowing authority without Republican help, which could head off an economically crippling debt default.
As a stalemate between Republicans and Democrats showed no sign of abating, Biden said there was a “real possibility” that his party would bypass the long-standing supermajority voting requirement known as the filibuster for dealing with the debt limit.
That would allow Democrats, who hold a razor-thin Senate majority, to suspend the federal government’s $28.4 trillion borrowing cap without Republican votes.
THEMATIC CONTEXT: “The key development to take note in the language these days is the fact that Democrats are signalling that they will plan to use the “Reconciliation Act” to advance their plans with or without the Republican support. As we have been saying, when push comes to shove, the Biden administration will get the spending plans approved and start boosting the economy ahead of the mid-term election in Nov 2022.” — 30th July 2021
COMMENTS/IMPACT: When push comes to shove, the Democrats and Biden will do what they must and see it through. From that vantage point, we are pretty certain the debt ceiling will be raised and don’t view this saga as a key risk event.
Notable Snippet: President Joe Biden warned on Tuesday that failure to pass his huge social and infrastructure spending package could contribute to America’s decline, while lawmakers in his Democratic Party wrangled over its price tag.
Squabbling Democratic moderates and progressives dealt Biden a setback last week when they failed to move ahead with his proposed $1 trillion infrastructure bill or a planned $3.5 trillion social spending bill, which is now facing cuts.
“We’re at risk of losing our edge as a nation … To oppose these investments is to be complicit in America’s decline,” he said.
THEMATIC CONTEXT: “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.” — 1st Oct 2021
COMMENTS/IMPACT: We remain cognizant of this development as it has been the underpinning factor for equity strength since the elections and any changes will have a repricing of risk assets as it will outline the capability of the Biden administration to unleash unlimited fiscal money.
Notable Snippet: Britain’s economic bounce-back after coronavirus lockdowns is being hampered by problems in supply chains, a jump in inflation and the risk of a rise in unemployment, complicating the task for policymakers of steering the recovery.
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
COMMENTS/IMPACT: 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.
Phan Vee Leung
CIO & Founder, TrackRecord