Canada may be the wild west's canary in the reflation mine

The local market turned recent weakness to deliver a positive day on “buy the dip” sentiment flowing from the US market. We are in the fifth consecutive week without a double-digit billion-dollar turnover day. Every sector is positive except Energy and Utilities. Despite all the supply side issues…fake or real…energy demand worries are starting to worry markets as pandemic waves have an effect. 

Europe has major parts in some form of restriction or lockdown, while other parts are moving towards it. India is breaking pandemic records for all the wrong reasons. Health Care, Property and Tech are the best performing sectors and that is clearly being driven by lower yields through Central Bank yield control moves. Energy and Utilities were the laggards with lower Oil and AGL management changes.

Gold stocks are recent big movers and macro winners, as US monetary and fiscal policy settings move the economy away from recession and closer to stagflation. Gold remains the safety, inflation and currency hedge for fund managers. Spot Gold broke the recent down trend and has started to climb higher over the past month due to falling negative real yield. US economic addiction to stimulus makes it impossible to stop money printing, currency debasement and yield control. 

Economic reality means fantasy policy settings need endless stimulus. Eventually, a left field event will create a mess that even stimulus can’t hide. Until then, the Central Banks and governments will continue to repeat the same process and expect a different result…despite that making the problem worse. Reflation is coming and ignoring it won’t deliver outperformance. Look to expand your reflation exposure for risk management.

Bank Of Canada (BOC) had its policy update overnight and also released inflation data. Canada is an interesting case study, being the most comparable country to Australia for several reasons. These commonalities include: 

• well regulated banking systems, 
• commodity economies, 
• housing bubbles, 
• similar multi-cultural western economies.

I'd also argue they have similar political systems with ineffective governments. Both have wasted multiple commodity cycles by allowing corporates to take full benefit while tax payers took all the risks. So, it was interesting for markets that BOC moved to cut its QE while keeping rates on hold as inflation moved above 2%. QE reduction is the precursor to rate hikes. 

Even BOC's fudged core inflation is picking up pace. The Canadian economy is not doing as well as the Aussie economy. The fact that Canada is reducing QE (i.e. pseudo tightening to control asset bubbles) with a weaker economy while Australia is ramping up QE (i.e. pseudo loosening with bigger asset bubble worries) does not add up. The RBA has one thing in its corner. Since they lost control of AUD/USD and the US currency declined, rising AUD/USD will keep inflation in check. If inflation in the US keeps beating expectations, rates are going up globally…irrespective of what the RBA does. Canada may be the wild West canary in the reflation mine!

Comments on US market last close

The US market recovered more than it lost yesterday despite very little catalyst to justify the move. Market continues to back endless money printing to keep the recovery on the rails. Buy the dip was back today. Volatility is picking up as risk rise on pandemic, inflation, valuations and reporting season updates. RUSSELL +2.36%, NASDAQ +1.19%, DOW +0.93% and S&P +0.93%. USD faded slightly with bond yields. Oil fell on demand worries. Gold and Copper moved higher. Bank of Canada kept rates on hold but reduced QE. It’s the canary in the QE mine. You have to fade out QE before raising rates. It’s hawkish or tightening... depends on your view. In line with what China is doing. Gold and Banks were the best sectors while Utilities and Staples were the worst.

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

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