Central Banks talking hawkish and walking dovish

Local market followed the US market by bouncing back from the bash day. It was a low turnover day and global guys were the main traders in the market. European and Asian markets were positive. Size mattered as the performance fades with size. Micro caps barely moved today. Miners and Property lead the positive sectors while Staples and Utilities were the worst red sectors. China moved to support fading growth with more lending and that turned the sentiment for the miners. The main play today was the move by WES to take over API. It was cheap and it is a sector with a few players that are not doing well. Perfect for someone like WES to jump in and clean up with their massive balance sheet. Competitors should be worried. Expect some reaction from industry players trying to defend their turf.

The data points for this week are mainly US inflation, China GDP and US reporting season. US reporting season should be solid as peak growth was Q2 but outlook statement should start to point to lower growth outlook and higher cost outlook. Markets trading at 20 year high multiples will struggle to deal with that. US markets need big beats on every reporting cycle when multiples are this high.

US inflation likely to remain hot into 2022. Globally Central Banks are talking hawkish but acting dovish. They have no intention of letting the economic cycle play out and let the real recovery take over. They want to keep control and keep pumping asset bubbles. RBA is a classic example. RBA keeps throwing random non correlated updates in the market to divert from the fact that they do not have a time line for QE tapering or rate cycle except in the “never never”. APRA has flagged the banks to get ready for negative rates. Since negative rates strategy has been so successful in the global ponzi schemes such as Japan and EU, it is completely logical that we follow their success. Sadly, RBA can pull this off as the Federal Government is stuck in new ways to stuff up the pandemic management and vaccine rollout. The problem for asset bubbles around the world is that US Fed is the ultimate savior of the global ponzi scheme and they can’t go negative without creating hyperinflation. USD is the global currency and endless money printing will devalue USD and create even more inflation. China is standing on the side for the Steven Bradbury move to take over. RBA will never raise rates till it blows up and that will be too late. ECB has announced that they will provide new policy setting in 10 days but they can’t do much at all. They have joined the Japan scheme of never ending money printing and it is too hard to leave that strategy and do real reform. Australia is chasing the same model with a proven failure rate. We are going to get the next inflation update from US on Wednesday morning. China GDP update later this week. 

Central Banks continue to prioritize asset bubbles over economy that favors the top 20% over the bottom 60%.

NSW cluster continues to grow and we are seeing more and more evidence that the public are ignoring the government. Most experts are now calling that lockdown in NSW will be extended to the end of July but likely to August. We still don’t have front line workers, aged case and disability groups vaccinated. NSW had been lucky in previous outbreaks. The health care workers saved the government from number of childish mistakes that could have cost so much more lives than it did. NSW government continues to make mistakes and the luck has finally run out. The “mockdown” failure is likely to deliver even longer hard lockdown. It looks inevitable that the lockdown will extend to end of July.

Markets do not rise in a straight line and they do not fall in a straight line. Delta variant is now the main variant on all major regions. UK is planning to open up within weeks while delta is spreading like wild fire. US has the same problem but they are dealing with substantial part of certain states that do not want to get vaccinated for political reasons. Europe, Asia, Africa and South America are still stuck in their own pandemic waves. One of the main inflation boosters is the supply side issues. Pandemic related issues are likely to keep the supply side disrupted well into 2022. It is logical to assume that rising costs will hit margins. We are already seeing signs that growth has peaked. Slowing growth and rising costs with a stagflation economic outlook just does not match up with historic high multiples. It’s going to be a few months of volatility ahead.

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

The value of outstanding loans in China increased 12.30% in June of 2021 over the same month in the previous year. Figures beat market forecasts of 12.1%.

Total social financing in China increased to 36700 CNY HML in June from 19200 CNY HML in May of 2021. Figures beat market forecasts of 28700 CNY HML.

Broad M2 money supply in China rose 8.6% from a year earlier to CNY 231.78 trillion in June of 2021, above 8.3% in May and market expectations of 8.2%.

The unemployment rate in Canada fell to 7.8% in June of 2021 from 8.2% in May, slightly higher than forecasts of 7.7%. Most regions in the country began lifting coronavirus restrictions in June. Most indoor and outdoor dining, recreation and cultural activities, retail shopping, and personal care services had resumed or continued in eight provinces, with varying degrees of capacity restrictions. The total number of unemployed fell by 61,000, the number of people in the labour force increased by 170,000 and the labour force participation rate increased 0.6 percentage points to 65.2%.

The Canadian economy created 231 thousand jobs in June of 2021, above market expectations of a 195 thousand rise and following a cumulative decline of 275,000 over the previous two months. Job gains were entirely in part-time work (+264,000) and concentrated among youth aged 15 to 24 (+164,000; +7.1%), primarily young women, marking the largest single-month increase for this age group since July 2020. Meanwhile, full-time work was little changed (-33 thousand). Employment rose markedly in June in several services-producing industries where a high proportion of jobs involve face-to-face interactions with the public, including accommodation and food services (+101,000), retail trade (+75,000), and "other" services (+24,000). Employment increased in Ontario, Quebec, British Columbia and Nova Scotia. The number of Canadians working from home fell by nearly 400,000 to 4.7 million.

Machinery Orders in Japan increased 7.80% in May of 2021 over the previous month.

Producer Prices in Japan increased 5% in June of 2021 over the same month in the previous year.

Industrial production in the UK rose 0.8 percent month-over-month in May of 2021, following a downwardly revised 1 percent decrease in the previous month and compared with market estimates of a 1.5 percent gain. Increases were seen for mining & quarrying (3.8 percent vs -15.7 percent in April) and electricity, gas steam and air conditioning (5.7 percent vs 1.2 percent). Meanwhile, manufacturing activity went down 0.1 percent. Year-on-year, industrial output advanced 20.6 percent, following a downwardly revised 27.2 percent growth in the prior month.

Comments on US market last close…

US market bounced hard after the belting the day before on weak turnover to finish the day. There was short and gamma squeeze in play for markets at historic leverage growth. Negative Asian markets moved to positive European markets as ECB comments confirm that they are well and truely in Japan type endless printing ponzi economy with frequent boom bust cycle. NASDAQ +0.98%, S&P +1.13%, NASDAQ +1.30% and RUSSELL +2.17%. USD slide lower while yields rose higher....7-8 bps? There’s nothing normal about that. And yet NASDAQ went up? Again...don’t look for logic or correlation. Oil went up again as it seems to do even as pandemic lockdowns increasing globally. Gold and Copper were positive and lead metals higher. It was index level moves in the open and grinding higher after that...as such all sectors were green with Banks and Energy leading while Health Care and Utilities lagging. Gold as a sub sector was on the move higher. US junk bonds are trading at negative real yields. It is clear that global growth peaked in Q2 and such the reporting season starting next week will deliver peak data while outlook statements are going to be key to keep markets at these levels.

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