Gold shines in stagflation risk

Local market had a choppy negative day that slide further negative as regulatory moves in China started to hit commodity markets. Relatively low turnover continues for the seventh week without a double-digit turnover day. Size mattered with Small Caps being the least negative while Mid Caps were the worst. Property and Industrials were the best sectors in a red day while Tech and Utilities were the worst hit. US market delivered another positive lead despite all the macro data worse than expected while Asian markets were back in the red as more China crackdown surfaces.

US market optimism continues to back the view that US Fed has their back despite every economic data point flagging rising inflation and weaker economic growth. Stagflation worries are rising as some parts of US starts to feel the pressure from Delta variant. It is becoming clear that inflation is persistent than transient and yet expected to keep rising while growth is fading. We had a massive reporting weak where US mega techs mainly underperformed after the result despite a 90% beat rate. Wonder what happens when the economy and market weakens at peak stimulus under inflation problem? You can’t add more stimulus without making the problem worse. 

At some point the markets will realize that cycle problem. May be the market is starting to work that out as bonds rally and USD slides. Stagflation in peak stimulus can’t support historical high multiples. It may be different this time!

China crackdown has moved from techs to education to commodities. Markets are expecting steel sector to feel the changes on the weekend as seasonal weakness starts to play out for Iron Ore. China is willing to lose billions for reform. It will spook investors and that may keep China exposure out of global play for a while yet.

Global growth is taking big hits on the back of new Delta variant waves. Emerging Markets are unlikely to get vaccine coverage till late 2022 and that means major parts of the global economy and supply chains are going to remain under pressure. Developed Markets are struggling to get vaccine rates past 60% due to political mistrust. All the modeling suggest 70-80% vaccine coverage needed before the economies can open up. Global growth is going to remain under pressure into 2022. Gold remains the strong value hedge against inflation risk.

Too many macro indicators have been replicating 2020 Jan/Feb trend in 2021 Jun/Jul cycle. We are in peak stimulus and Central Banks are not going to taper anytime soon. What happens when stagflation hits at peak stimulus? Can more stimulus solve that? Time will tell. It may be different this time!

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