Bonds are warning equities about the “Ides of March”

The local market popped at the open, with global investors buying into the currency trade, but basically went sideways throughout the day. 

The market was up more than 50 points, around 30 of these coming from Resources and 10 from Financials. Materials, Energy and Health Care - which were the outperformers. Meanwhile, Industrials and Staples were the only negative sectors. 

It is clear the reflation trade has been joined by the month-end pump trade. There is no denying that the reflation trade and global investors jumping into the commodity market account for the lack of resource exposure in the US. 

Copper and Oil are the leading contenders for direct commodity plays for reflation by global investors - something for which the Chinese have been using Iron Ore for years. 

The bond market is selling off in a hurry. Bond yields are hitting new multi-year highs on a daily basis, while the US Fed has been very clear it will let it run hot. 

NZ bonds were smashed as they move to control their property bubble, while in Australia it is a “Bubble Now Pain Later” strategy. Love her or hate her, NZ PM Jacinda Arden never runs away from making tough choices. 

In Australia, the Federal Government continues to set new records in policy and reform failures. This highlights just how lucky it was that state governments handled the pandemic as well as they did - mostly due to very hard-working healthcare workers, a good healthcare system and a lot of luck.  It says a lot about the workers and the system when it delivers despite State and Federal governments continuously cutting funding and underpaying most of the staff. 

Maybe the next election, one of the major parties should propose a 1% Medicare levy on high-income earners to fund a pay-rise for health workers. After all, even the politicians seem to love using hospital care - especially to escape public scrutiny when their cover-up lies spectacularly blow up!

On the global front, the bond market is clearly showing that reflation is happening. The US Fed is leading all Central Banks in swimming in the river denial. Globally, Central Banks have fudged their core inflation to remove the majority of the volatility items such as food, fuel, and housing, in a bid to make cutting rates far easier than raising them. 

In reality, most Australians have been experiencing inflation of around 4-5% for the past year and it’s going to get worse. Central Banks are right in saying the employment market is going to be weak for years, as most corporates will move to reduce workforces and automate as soon as handouts finish. 

I expect somewhere in the order of 20% and 30% of small businesses will be bankrupt, or close to it, in the next six months. 

Unemployment in most of the world is around 4-5% higher when removing the handouts. So the economic reality is that there is rampant cost inflation, while there is no chance of real wage rises over the next few years. 

Fund managers are holding their nerve in continuing to expect the equity market to ignore the bond market and hold up for a few more days, in order to lock in solid month-end performances. If you are a growth fund manager, you are burning your small positions to support the big positions to manage risk. 

The problem is, the bond market is collapsing and yields are running hot. The market is packed with crowded trades. If the bond market keeps rolling over, there may be very little firepower left to hold the equity market up in March - which starts next week. 

How will “Bubble Now Pain Later” hold up with yields going to 3%? No one thought 1.5% would happen and it looks like 2% is coming in Q2. From that point, 3% doesn’t seem a huge leap of faith. Get ready for the “Ides of March”!

Comments on US market last close

US market started weak but finished a positive day on opening up and reflation trade. RUSSELL up over 2% with NASDAQ lagging the pack up 1%. Bond yields continue to climb…US 10 got to 1.43% but settled back at 1.37%. Commodities are still running hard while USD is flip-flopping. GameStop is back on volatility...ran nearly 100% in the last few hours today. Market confused with commodities and bond yields. Resources and Financials lead the move while Utilities and Staples were the only red sectors. Central Banks are losing control as reflation starts to create havoc.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

Full SUNSET STRIP report with the end-of-day market stats are on the attached link/pdf.