Casualties of reflation wars are asset bubbles

The local market started negative on weak US lead before China geopolitics took it another layer lower. Janet Yellen has let the cat out of the bag. More to the point, central banks and governments are losing control of inflation and it is coming for asset bubbles. Elevated multiple sector in tech was the leading candidate for pain in a day where all sectors were red except for commodities like energy and miners. US techs are a crowded trade and buying the dip has been a good strategy. That is about to change with reflation. But are the investors ready for that change? Time will tell. Get ready for 3-4% inflation data in the US next week!!!

China geopolitical concerns

China geopolitics is another own goal by Federal Government looking for distraction from local policy disasters. China "indefinitely" suspended on Thursday all activity under a China-Australia Strategic Economic Dialogue, its state economic planner said, the latest setback for strained relations between the two countries. "Recently, some Australian Commonwealth Government officials launched a series of measures to disrupt the normal exchanges and cooperation between China and Australia out of Cold War mindset and ideological discrimination," China's National Development and Reform Commission (NDRC) said in a short statement on the decision. The commission did not say in the statement what specific measures prompted the action. It should come as no surprise as Federal government has been on a China bash for distraction play against the domestic policy mistakes. Not sure what the long term plan was because the amount mistakes and the number of sectors in a mess would really require Australia to go to war with China. And before the warmongers get excited, there is no upside for China to go to war as they are so far ahead in global domination through financial take over that they don’t need Australia.

Just for context, if human rights were the concern, Australia deals with governments and military forces in Asia that have done and continue to do genocide. It is a bit like banning flights from India and China when pandemic gets out of control but never doing that against US or UK. No one is arguing the policy is not fair but it loses gravity when you pick and chose when to apply it. Just like cricketers who went to India on a high risk and high paying contract work get emergency plan to get out of India while Australian citizens in India haven’t been able to return for nearly a year. The power in geopolitics is all about consistency and Australia doesn’t have that. Nor do we have the leverage. Backflipping on bad policies that allowed the China deals that being currently broken will only weaken our standing in the global scale. China is playing the long game and Australia is playing the short game. What could go wrong? Time will tell.

Elsewhere in markets...

Producer prices in the Euro Area rose 4.3% from a year earlier in March 2021, following a 1.5% advance in the previous month and slightly beating market expectations of 4.2%. Producer prices in the Euro Area rose 1.1% from a month earlier in March 2021, following a 0.5% advance in the previous month and matching market expectations. Upward pressure came from all categories: energy (2% vs 0.3% in February); intermediate goods (1.3% vs 1.2%); non-durable consumer goods (0.8% vs 0.3%); durable consumer goods (0.2% vs 0.2%); and capital goods (0.3% vs 0.1%). On a yearly basis, producer prices jumped 4.3% in March.

The ISM Non-Manufacturing PMI for the US dropped to 62.7 in April 2021 from an all-time high of 63.7 in the previous month and below market expectations of 64.3, indicating slowing growth in the services sector. Still, the rate of expansion was the second strongest on record. Business conditions were likely restrained by shortages of inputs amid growing demand on the back of the government's $1.9 trillion relief package and the acceleration of COVID-19 vaccinations. There were slower growth rates for both output and new orders, while the pace of job creation quickened to the highest since September 2018. The survey's measure of prices paid by services industries rose to 76.8, the highest reading since July 2008. Still not seeing inflation? Time will tell.

Comments on US market last close… 

US market recovery post Yellen backtrack wasn’t much at all. It was mainly a flat and volatile day when DOW squeezed out a slight positive while NASDAQ and RUSSELL went south. DOW +0.29%, S&P +0.07%, RUSSELL -0.31% and NASDAQ -0.37%. Economic recovery on stimulus and opening up is delivering better cyclical growth and higher inflation. Yellen was right to call it out but no one in government or central banks are allowed to mention it. Yields, USD and most commodities were lower while gold moved higher. Energy and banks were the better sectors while gold was an outperforming sub sector. Utilities and property were the worst performing sectors. We can already see some tax loss selling playing out. Time to start reducing market exposure ahead of the next US inflation update next week. More risk than return ahead in the short term.

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

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