Inflation is transient and asset prices are normal in wonderland

Local market started positive on a choppy low turnover day before sliding back to flat at the close. We have started seventh week without a double-digit turnover day. Markets continue to struggle for sentiment as high inflation and fading growth has been exaggerated by new pandemic waves. We have added China regulatory risk, US Fed update, Aussie inflation update, Aussie recession and main US big tech results to this week’s bonus risk catalysts. Size mattered with Mid Caps being the best while Small Caps being the worst. Miners and Banks lead the sectors while Energy and Property were the worst. Miners were the only green sector despite Chinese market wobbling on regulatory crackdown in the their tech sector.

Australian macro is going to be key this week. NSW lead lockdown is likely to drag well into August and weigh on Q3 growth. Markets are looking at the potential of double dip recession with unemployment going back above 6%. The Federal government budget is already blown out a trillion dollars in debt and was heavily reliant on Q3 recovery to support their election cycle. The election will be pushed back to Q1 while Federal government will try and hold out Job Keeper 2.0 as long as they can. It looks like every other region will be out of lockdown this week while NSW will be stuck well into August. It is going to be hard for the federal government to backflip when they rejected the same argument for VIC. Irrespective of what the Federal government does, small business in NSW are falling over due to death by thousand cuts. 

We will get the Q2 inflation data update on Wednesday. It is expected to hit post GFC high level around the high 3%. Don’t worry…it’s transient…for the delusional. For the rest of the people living in the real world, we all paid 5-10% more over the last 6 months for most things we consume. Inflation is transient for Central Banks, Governments and Top 20%. The rest of population will feel the pressure and will cut back on discretionary spending. Recession means unemployment will go up and wages growth will never happen. RBA will be back Sep/Oct to talk about more QE without reform. Remind you of something….yes….classic Japan ponzi scheme playbook. We are going towards being Japan without the manufacturing. It could be different this time!

China is cracking down on regulatory restriction on the tech industry. It has driven the Hong Kong index into correction mode. They are now moving on private education industry. Other industries are starting to worry. Given they are willing to take such aggressive moves to clean up their corporates despite massive market cap loss, Aussie business shouldn’t hold their breathe on regulatory backflips. Market darlings needing daigou channels may find that backflip could be longer than expected.

US earnings season takes center stage this week with mega caps reporting. US reporting season is on 90% strike rate and that is already priced in. Time will tell if the market moves higher on sentiment or sells on the update. US Fed update coming on Thursday. It will be interesting to see how they spin fudging the bond supply lower and QE buying higher. They are likely to keep the tapering in the long term future. US option market has moved from near multi decade high call to put option ratio to long term average level over July. Volatility will be elevated this week.

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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