AUDUSD may be the canary in the Equity bubble

Mathan Somasundaram

Deep Data Analytics

Local market started positive and faded into a slight negative close with BHP pulling the index lower. Global growth worries and local recession worries continue to rise. Relatively low turnover continued into the ninth week in a row without a double-digit turnover day. Size mattered as Mid Caps were the best while Micro Caps were the worst. Property and Utilities were the best sectors while Miners and Energy were the worst.

The main points affecting the global macro…

(1) China regulations/reforms > China moves to break dominant cartel like business models and curb commodity price inflation continues to drive elevated risk. Chinese stocks and commodity prices remain under pressure. China data continues to weaken and that has not changed the mentality of the Chinese leadership. We do not see signs of stimulus ramp up in the short term to support recovery.

(2) US economy > Economic data continues to support delta waves and rising inflation are starting to curb consumer spending. Retail sales data showed backed that view overnight. Given the substantial part of the economic growth is driven by consumer spending, US growth is under threat. White House moved in recent weeks support the low income families by extending rental eviction out to 2022 while expanding food stamps by 25% compared to pre pandemic level. We continue to see elevated risk of economy growth fading on consumer spending weakness.

(3) Capital Wars > Race to attract capital in a world of low yield means Emerging Markets are starting to put up rates substantially. Eventually that will drag the Developed Markets to raise rates as capital leaves. Capital leaving will debase the currency and raise inflation. Even if global major central banks fudge the game, Emerging Markets are turning the table on them. Emerging Markets have nothing to lose and everything to gain.

(4) Currency Wars > Capital Wars a re delivering Currency Wars. USD is in decline as endless stimulus drives endless debt load. Slowing economy and rising inflation means more handouts are needed to keep 50-60% of the population above water. That will inevitably lead to more debt and currency debasement in the face of debt ceiling limits. Similarly, RBA may have to expand their yield control to currency control as a decent drop in AUDUSD will raise inflationary pressures. Once you go down the path of “fake it till you make it”, there is no coming back. AUDUSD has fallen below 73 cents and may be headed to 70 cents as China uncertainty and recession risks start to weigh on sentiment.

(5) Stimulus Worries > Investors are worried about taper tantrum. Central Banks are flagging tapering but there is no timeline. The reason that there is not timeline is the belief that fading growth and rising inflation will need more stimulus than less. The economies are carrying too much debt and have become too big to fail. Central Banks will not cut stimulus but keep adding more till the economy drowns in debt. We are near the end of the cycle as more QE is likely to be added with rising inflation. Locally RBA is already flagging through the media that QE expansion is coming as the economy weakens. Latest wage growth data shows real wage growth is years away and it has nothing to do with QE. But you can be confident that RBA will repeat the same failed process and expect a different result.

Seasonal cycles suggest the US market peaks this week as macro risks become the main play. US and Australian markets are about to have the monthly option/futures expiry and historical trend suggest weakness follows.

Let us run through the main data points released in the last 24 hours…

Housing starts in Canada declined 3.2% over a month earlier to 272,176 units in July of 2021, compared to market expectations of 275,000 units, according to Canada Mortgage and Housing Corporation (CMHC). It was the lowest reading since last December. Urban starts fell by 0.7% to 251,190 units, as multiple urban starts decreased by 3.1% to 184,759 units in July, while single-detached urban starts increased by 7.1% to 64,242 units. Rural starts were estimated at a seasonally adjusted annual rate of 23,175 units.

US retail trade fell 1.1% from a month earlier in July 2021, following a revised 0.7% growth in June and compared with market consensus of a 0.3% drop, led by a decline in auto purchases and as a resurgence in COVID-19 cases hit consumer demand. The latest data also reflected the recent shift of spending from goods to services following the reopening of the economy. Receipts were down at motor vehicle & parts dealers (-3.9% vs -2.2% in June), building material & garden equipment & supplies dealers (-1.2% vs -1.4%), food & beverage stores (-0.7% vs 0.8%), furniture stores (-0.6% vs -2.2%), clothing stores (-2.6% vs 3.7%), and sporting goods, hobby, musical instrument, & book stores (-1.9% vs -1.8%). In addition, on-line trade fell 3.1% (vs 0.2% in June), payback after Amazon pulled forward its Prime Day to June from July.

Industrial production increased by 6.6% from a year earlier in July 2021, easing from an upwardly revised 9.9% growth in the previous month. It was the fifth straight month of rising industrial activity, reflecting a low base year and ongoing economic recovery. Production rose at a softer pace for both manufacturing (7.4% vs 10.2% in June) and mining (12.1% vs 16.6%), while it fell for utilities (-3.8% vs 1.8%).

Manufacturing production in the US increased by 7.4% year-on-year in July 2021, the fifth straight month of growth, following an upwardly revised 10.2% growth in the prior month. Durable manufacturing advanced 7.5%, boosted by production of machinery (13.4%), aerospace and miscellaneous transportation equipment (16.9%), computer and electronic products (9.3%) and fabricated metal products (6.2%). Meanwhile, output fell for motor vehicles and parts (-6.9%), amid ongoing supply issues linked to a persistent shortage of semiconductors. Nondurable manufacturing grew by 7.3% on the back of chemicals (9%), petroleum and coal products (14.3%), and plastics and rubber products (8.9%).

Manufacturers’ and trade inventories in the US increased 0.8% mom in June of 2021, following a revised 0.6% rise in May and in line with market expectations. It was the 12th consecutive month of gains in business inventories. Stocks were up at wholesalers (1.3%) and manufacturers (1.1%) but fell 0.9% at retailers. Year-on-year, business inventories jumped 6.6%.

The NAHB housing market index in the US dropped to 75 in August 2021, the lowest since July 2020 and well below market expectations of 80. The current single-family sub-index declined to 81 from 86 in the previous month, and the gauge for prospective buyers fell to 60 from 65. Meanwhile, the home sales over the next six months sub-index was unchanged at 81.

Australia's seasonally adjusted wage price index rose by 1.7% year-on-year in the June quarter of 2020, after a 1.5% gain in the prior period and compared with market estimates of a 1.9% rise. This was the highest reading since the second quarter of 2020, amid improved business conditions in the wake of the COVID-19 pandemic, with private sector wage growth accelerating (1.9% 1.4% in Q1). Meantime, the public sector recorded its lowest annual rate of growth since the series commenced in 1997 (1.3% vs 1.5%). Across industries, annual wage growth ranged from 0.1% for the utility sector, transport, postal, health care, and social assistance to 0.6% for the rental, hiring, and real estate services industry. On a quarterly basis, the wage price index advanced 0.4% in the second quarter, one of the lowest rates recorded for the series, following two-quarters of 0.6% growth.

Comments on US market last close…

US market had a negative day on global weak growth sentiment boosted by weaker than expected retail sales update. RUSSELL -1.19%, NASDAQ -0.93%, DOW -0.79% and S&P -0.71%. VIX climbs 11% to be just short of 18. Delta waves and China data confirms global growth fading while bigger than expected fall in retail sales confirmed the big fall in consumer confidence last week. It is starting to look like we have passed peak everything and it's into the fading cycle. Inflation may be more persistent than expected due to property and delta effects to remain elevated. US has jammed up food stamps from Sep end and extended mask for air travel into 2022. Yields fell and then recovered while USD rising on risk off. Commodities are falling while Gold remains flat. Health Care and Property were the best sectors while Energy and Materials were the worst.

You can view the full Sunset Strip report, with charts and the end of day market stats, on the following link.

(VIEW LINK)


........
Deep Data Analytics provides this financial advice as an honest and reasonable opinion held at a point in time about an investment’s risk profile and merit and the information is provided by the Deep Data Analytics in good faith. The views of the adviser(s) do not necessarily reflect the views of the AFS Licensee. Deep Data Analytics has no obligation to update the opinion unless Deep Data Analytics is currently contracted to provide such an updated opinion. Deep Data Analytics does not warrant the accuracy of any information it sources from others. All statements as to future matters are not guaranteed to be accurate and any statements as to past performance do not represent future performance. Assessment of risk can be subjective. Portfolios of equity investments need to be well diversified and the risk appropriate for the investor. Equity investments in listed or unlisted companies yet to achieve a profit or with an equity value less than $50 million should collectively be a small component of a balanced portfolio, with smaller individual investment sizes than otherwise. Investors are responsible for their own investment decisions, unless a contract stipulates otherwise. Deep Data Analytics does not stand behind the capital value or performance of any investment. Subject to any terms implied by law and which cannot be excluded, Deep Data Analytics shall not be liable for any errors, omissions, defects or misrepresentations in the information (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the information. If any law prohibits the exclusion of such liability, Deep Data Analytics limits its liability to the re-supply of the Information, provided that such limitation is permitted by law and is fair and reasonable. Copyright © Deep Data Analytics. All rights reserved. This material is proprietary to Deep Data Analytics and may not be disclosed to third parties. Any unauthorized use, duplication or disclosure of this document is prohibited. The content has been approved for distribution by Deep Data Analytics (ABN 67 159 532 213 AFS Representative No. 1282992) which is a corporate approved representative of BR Securities (ABN 92 168 734 530 and holder of AFSL No. 456663). Deep Data Analytics is the business name of ABN 67 159 532 213.

1 topic

Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.