Leveraged hedge funds are the new cannon fodder for reflation cycle

Mathan Somasundaram

Deep Data Analytics

The local market started positive then fell for the rest of the day to deliver another negative day. Markets started to show risk-off trade, building momentum on a global basis. It was another weak turnover day and that makes seven days in a row. Telecom was the only green sector while miners and utilities were the worst hit. The latest COVID-19 numbers suggest that Brisbane lockdown is likely to be extended into the Easter long weekend. It is amazing how every holiday period or long weekend has had a covid cluster in Australia. 

We are in the last few days of the month/quarter and macro risks are rising. Global passive asset allocation was expected to move from equities to bonds, but we are seeing selling on both as yields climb back up near the recent highs. USD is breaking out of the 12 month downtrend and now above all moving averages. COVID-19 cases are rising globally, mainly hitting EU, EM and US. EM remains a mess while EU is in rolling lockdown restrictions. Despite the massive vaccine rollout strategy, US is starting to see substantial pick up in COVID-19 cases with new variants. 

CDC chief warns US is headed for ‘impending doom’ as COVID-19 cases rise again…‘Right now I’m scared’. 

It does seem like the pandemic is still having an effect on the economy even after a year, while markets are priced in a V-shape recovery. 

Supply-side shocks are driving the reflation cycle and the US bond yields are hitting new post-pandemic highs. Can equities absorb downgrades and 2.5% yield? Stretched multiples are going to get a work out as reality bites! We have already seen the weakest links becoming roadkill in the crossroads of optimism and reality. 

Turkey is leading the Emerging Market mess with weak currency, weak economy, too much leverage and erratic leadership. Now we are seeing the same happen in the finance sector. Hedge funds with weak risk management and high leverage are the tip of the iceberg. Markets are going to pay attention to medium to long term stagflation risk after the short growth/inflation pop. Leverage is a knife that cuts both ways. Expect corporates and households to deleverage as the reality of a weak economy becomes obvious. We are already seeing US corporates drive historical high buybacks growth instead of investing in capex for growth. More and more cracks are going to keep opening up as governments cover structural problems with asset bubbles.

The world has flipped on its head. We have US Fed and RBA telling everyone to borrow and spend like there is no tomorrow while PBoC is warning the world about too much debt and asset bubble risks. China is pulling back their currency against the USD after running over 10% in the last 12 months. We are seeing signs of Chinese traders stockpiling commodities since the Yuan started to fade over the last few months. Expect USD to continue to rise on risk-off and that will drive Yuan and AUD lower in the short term.

Comments on US market last close 

US market was all over the place. RUSSELL down 2.8% on hedge fund margin call liquidation hitting banks. NASDAQ down 0.6% on tech selling. S&P down 0.1% while DOW up 0.3% on opening up economy and vaccine rollout. Utilities and Staples were the best sectors while Energy and Banks were the worst. Suez Canal is clearing up as the crash ship moves. Bond yields back up at 1.71% and USD ticked up. Commodities fell but Oil moved up despite Suez clearing. Looks like the asset allocation changes are going to be in early April.

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

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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