Tighten Your Belts: Market Observations

The chart above shows that, for all the hardship still evident, America, Inc., has done a creditable job of shaking off many of the tribulations of the past year. In fact, if we strip the struggling energy sector out from the aggregate above, things were looking all the more encouraging, going into the autumn.

As the cash registers have started to tinkle again at the nation’s factories and farms, distribution centres and warehouses, shops and offices, those responding to the ISM & NFIB surveys have been correspondingly more upbeat. The improvement out in the real world of business, magnified by market players’ urge to find a use for some of the cash burning a hole in their pockets – has done its usual trick of improving credit spreads and hence easing financial conditions even further.

Let’s just hope the Biden Administration (if such a thing does come to pass) doesn’t sacrifice all this on the altar of symbolic differentiation from its predecessors in office.

As a consequence, the average stock – as approximated by the Value Line index, has finally broken out to the upside. Projecting either from the post-Lehman low and the 2014-16 ‘Hidden Recession’ or the lesser-scale, Trump reflation move forming its second half, we could conceivably see the gauge extending all the way up to 8,200/400, some 10% higher than the present level. Stops should obviously be arranged around the pre-COVID highs at 6,800.

Asset Managers have clearly been involved in this move, as the COT report reveals, even if retail – as evidenced by the only briefly interrupted haemorrhaging of ETF and mutual fund holdings – is still anything but enthusiastic. It is true that we are starting to push into levels of exposure only topped in the wild enthusiasm which was so dramatically dispelled by the arrival of the Wuhan Flu, but further chips may yet be pushed onto the table before the mood decisively changes.

As we have discussed on several occasions, the tantalising prospect of being granted parole has lessened the domination of investor appetites by Tech in particular and ‘Growth’ in general. If the prison gates continue to swing slowly open, expect more of this rebalancing to occur. Here we are focusing on US manifestations of this, but the same arguments apply across the globe.

In general, this should not bode well for the bond market. Treasuries and finance ministries everywhere are not likely to be overly retiring in the months ahead – especially if they are to make good on their (largely unsolicited) pledges to finance or otherwise subsidise the Olympian schemes harboured by the Elite to thoroughly reshape the Western world’s means of transport and its sources of heat, light and power.

What this should mean is that the bond maket becomes even more reliant on the central banks to absorb the supply and while they profess to be more than willing to do so, recovery in any shape or form should reduce other buyers’ perceived need for ‘safe assets’ and so allow yields to drift, if hardly to soar, ever higher. With such returns as are to be extracted from fixed income now almost wholly reliant upon the notional capital gains which come with falling yields, such disinclination should only grow more marked – even in the absence of any insistent quickening of ‘inflation’.

Incidentally, for those who cling to the fond belief that, in today’s Whacko world, stocks cannot rise unless interest rates are falling, we offer you the clear counter-example of China. Here, the CSI300 has finally pierced the ceiling of the last period’s congestion area, even though yields have marched smartly upward for over six months – propelled lately by a toxic cocktail of heavy, ongoing supply and a nasty burst of Lehmanitis in the corporate bond market where several high-profile entities (some of them state-controlled, no less) have sparked outrage – as well as firm official sanction – by trying to bilk their creditors.

Credit might be tight in the tangible world of coal and cars and chip-fabs, but it is readily to be had in the stock market where a cool CNY1.57 trillion in official margin is now being used for table stakes.

‘Hard’ assets are still doing well. Beans and wheat are at or near 6-year highs; sugar is close to its best in 3 years; corn and cotton are climbing back to where they were in the first half of last year. Among the ‘useful’ metals, copper is the stand-out, regaining the levels seen at the start of 2014, but nickel, lead, zinc, aluminium, and tin have also all shaken off the declines of the past year or more.

Though clearly the most immediately susceptible to further declarations of mass house arrest, even crude oil has been showing signs of stabilising. Conversely, the anti-commodity par excellence – gold – has offered its legions of die-hard advocates yet another chance to acquire that long-promised full allocation that they swear they will take if only it would ever again trade lower again (!)

The uncomfortable truth here is that it has been exactly the prop traders, the algos, and the like who have been pushing gold higher of late. These are the types least likely to (in the first category) and inherently unable to (in the second) show any firm resolve to hold on to it, once its upward momentum reverses.

Hence the present slump. Goldbugs will now have to hope that the round number appeal of $1800/oz provids a floor (also a level which capped the 2011/12 attempts to regain its previous record highs, as well as one temporarily providing a brake during the most recent ascent). If not, $1740 beckons next.

The one major market where there is little real sign of consensus is forex. Having shot upward in May from below the $1.0800 level, the euro has since spent four wearisome months trading back-and-forth in a 3-big figure range ($1.16/19) versus the Greenback.

Likewise, after the wild gyrations of the Corona Crash itself, there has been a long, slow erosion from ~Y110 to ~Y104. As it does vis-a-vis the euro, the dollar sits perilously close to a reasonably significnt trend-line. Break one and the other will probably be violated, too. Do that and then we WOULD start to see some fireworks in commodities, and risk assets in general.

Over to you, Mr. Powell and Madame Yellen!