Fading growth recovery and US reporting season

Local market started negative before Banks recovered and reduced overall market underperformance. Markets continue to struggle for sentiment in the recent week. Size mattered in risk off with Large Caps falling less while Micro Caps were hit hard. Health Care and Staples lead the sectors while Miners and Energy were the worst.

NO SUNSET STRIP TOMORROW >>> GETTING MY FIRST VACCINE JAB!!!

The main thematic in play is the slowing economic growth outlook. Markets are trading at all time high multiples with very high growth expectations due to excess stimulus. Inflation has turned up and that is driving up costs. Some of that inflation is cyclical and some are structural. Central Banks have manipulated the cycles so much that it is not clear when the cyclical inflation factors will fade. It is becoming clearer that the structural inflation factors are going to remain elevated well into 2021. The problem is that the majority of the S&P 500 companies in the US will report this week and their guidance under rising costs and lower growth will require even higher multiples. Falling bond yields and AUDUSD suggest that markets are moving to risk off mode in anticipation of such a move. Equities has been almost untouched on the negative news while Central Banks are willing to risk it all to save asset bubbles. US Fed was unwilling to put a time frame on tapering as they were hoping that weaker global growth will remove that being actioned.

South Korea has jumped ahead of NZ as the potential PanAsian country aiming to tighten monetary conditions. They are planning to raise rates as early as August as property bubble and consumer debt stress starts to weigh on outlook. South Korea is Asia’s fourth largest economy and will set the trend much stronger in diverging from the ultra-accommodative policies of the US, Europe and Australia. APRA didn’t flag negative rates for nothing. RBA may have very little option in a double dip recession than to take rates negative and add more QE. Things may get even more weird before rationality returns. 

How long can markets continue to diverge from reality on money printing? Are we heading to stagflation to avoid double dip recession like the US? Time will tell.

NSW mockdown/lockdown has now been extended till the end of July and we have triggered a VIC lockdown. VIC lockdown expected to be extended while NSW numbers are not fading. Markets are now starting to worry about lockdown in the two major states driving a double dip recession worries. Sadly there is a lot of global and local data sets matching up to what happened early last year. UK is planning to relax all restrictions and that will be test case for opening up with risk. 

Keep an eye on the bond and currency markets…if the bond yields and AUDUSD keeps free falling, history suggests equities will panic soon. It may be different this time!

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

Annual inflation rate in the Euro Area was confirmed at 1.9% in June of 2021, in line with the preliminary estimate, and slowing from a 2-1/2-year high of 2% in May. Biggest contribution came from energy (12.6% vs 13.1%), followed by non-energy industrial goods (1.2% vs 0.7%), services (0.7% vs 1.1%) and food, alcohol & tobacco (0.5%, the same as in May). A low base effect from last year is also weighing. In June 2020, inflation rate in the Eurozone was 0.3%. The ECB expects inflation to increase later in the year but the rise should be temporary.

The monthly SAAR of housing starts for all areas in Canada fell 1.5 percent from a month earlier to 282,070 units in June 2021, still beating market expectations of 270,000 units, according to Canada Mortgage and Housing Corporation (CMHC). Urban starts decreased by 1.8 percent to 251,190 units, due to an 8.5 percent decline in single-detached urban starts. Meanwhile, multiple urban starts increased by a slight 0.6 percent. Rural starts were estimated at a seasonally adjusted annual rate of 30,880 units.

Wholesale sales in Canada inched up 0.5 percent over a month to CAD 72.2 billion in May of 2021, the third straight monthly gain but missed market expectations of a 1.1 percent rise. Sales were higher in four out of seven subsectors, with the most significant contribution stemming from the food, beverage & tobacco subsector (+2.7%), reflecting the lifting of COVID-19 restrictions. To a lesser extent, sales also increased for the machinery, equipment & supplies (+0.5%) and the building material & supplies (+0.5%) subsectors. Across Canadian provinces, Ontario provided the most support (+1.3% to CAD 35.6 billion), followed by British Columbia (+5.3% to CAD 8.2 billion), while Quebec contributed with a significant decrease (-1.2% to CAD 14.4 billion), partly due to strikes at the Montreal port in April and May, which caused an estimated loss of around CAD 230 million in wholesale sales.

US retail trade rose 0.6 percent from a month earlier in June 2021, following a revised 1.7 percent decline in May and easily beating market expectations of a 0.4 percent decline, as demand for goods remained strong despite the recent shift towards spending to services. Sales rose at electronics & appliance stores, gasoline stations, clothing & clothing accessories stores, general merchandise stores, miscellaneous store retailers, and restaurants and bars. Sales of motor vehicles, however, dropped 2.0 percent, as a global semiconductor supply squeeze hit production. Excluding automobiles, gasoline, building materials and food services, retail sales increased 1.1 percent last month after a 1.4 percent decrease in May.

The University of Michigan's consumer sentiment for the US dropped to a five-month low of 80.8 in July 2021, from 85.5 in the previous month and missing market expectations of 86.5, a preliminary estimate showed. The erosion in morale was largely due to less favorable prospects for the national economy amid growing concerns about inflationary pressure, with consumers' complaints about rising prices on homes, vehicles, and household durables hitting an all-time record. Purchase rates, however, have benefitted from record increases in accumulated savings and reserve funds. The gauge for consumer expectations fell to 78.4 in early July from 83.5 in June, while the current economic conditions index declined to 84.5 from 88.6.

Comments on US market last close…

US market started positive and then kept sliding all day to finish in the red. Retail sales and earnings beat were ignored and inflation fears taking over as Michigan consumer sentiment fell hard when it was expected to rise. RUSSELL -1.24%, DOW -0.86%, S&P -0.80% and NASDAQ -0.75%. VIX popped to 18.45 as risk off kicked in. Yields barely moved, USD ticked higher and commodities slide lower. Energy and Banks lead the falls while Utilities and Health Care lead the green sectors. Asian markets were mainly negative while European markets were red. COVID deaths are rising in the US again as UK plans to drop all restrictions and go for herd immunity next week. As a global travel hub, it has already played it’s part in global delta spread and it may go hyper after next week. It is a experiment of corporate/economic hope against science reality. Israel is struggling despite leading the vaccination and UK is far behind. Option and futures expiry week is over and markets tend to be weak over the next few weeks.

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

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