Markets want socialism dressed as capitalism but stagflation is the side effect

Local market delivered a choppy flat day on low turnover. We have finished the fifth consecutive week without a double digit $b turnover day. Market started slight positive and faded to slight negative by lunch. The pump into the close deliver a mainly flat day. Banks were doing the heavy lifting in the sector category while CSL and Miners were also catching a bite. Retail and Staples were the worst performers. ECB update overnight was predictably boring as they were on hold on every category. Given that major parts of EU are in some form of pandemic lockdown restriction, it wasn’t a surprise that they stayed on the sidelines while being accommodative. Pandemic problems are running wild in EU, India and Brazil while latest news from US suggests public pushback against vaccination is starting to weigh on rollout and US version of the antibody resistant variant is starting to spread.

Markets are starting to believe the new administration in the White House is going to act on tax rises. As with anything, market was willing to buy the stimulus upside but not the funding coming from tax rises. As the reality of tax rises and tax loopholes being shut plays out, market multiples are going to be challenged in more dimensions. Historically stretched market multiples are already under pressure from reflation and that is weighing on the price while the tax rises are going to attack the denominator or earnings. Fiscal budget outlook for US is expected to remain worse than $1trill loss per year over the next decade assuming no more stimulus…but we all know that is not the case. White House has no choice but to raise taxes or run the risk of deficits going out of control. We are already at levels not seen since WWII. All areas of taxes from capital gains, property, corporate and personal tax loopholes will be in the firing range as announced in the election campaign. Markets continues to ignore negative news till it starts to hurt them. More than a decade of extreme stimulus has forced most of the economies to be mainly reliant on stimulus than organic growth. Markets want socialism dressed as capitalism but stagflation is the side effect.

Existing home sales has started to roll over as building costs and borrowing costs rising. Sales of previously owned houses in the US fell 3.7% from the previous month to 6.010 million units in March of 2021, the lowest in 7 months but much worse than market forecasts of a 0.8 percent rise amid record-high home prices and gains. The median existing-home sales price in March rose by a record-breaking annual pace of 17.2% to a historic high of $329,100, with all regions posting double-digit price gains. Housing inventory slightly rose to 1.07 million units but was down by 28.2% year-over-year. Properties typically sold in 18 days, a record low. Compared to March 2020 when home sales first started to fall due to the pandemic, sales are higher by 12.3%.

Comments on US market last close… US market started weak and then recovered before the capital gains tax hike took it into a solid negative day. It looks like market ignores tax hikes till they smell action on it. Corporate tax hike announcement should be fun to watch... if you like napalm in the morning! Capital gains tax takes it from half the high personal tax rate to matching it. It fixes one of the easiest and most used tax evasion schemes. NASDAQ -0.94%, DOW -0.94%, S&P -0.92% and RUSSELL -0.31%. Risk off trade drove bonds and USD higher which drove AUDUSD and commodities lower. Oil up today and it seems to move out of synch with macro but energy equities don't. ECB held rates and QE in their update and that's no surprise as most of the region is still under pandemic wave restrictions in some form. EU is most of the way towards a failed money printing science project like Japan. It's a matter of time it fades into socialism while claiming to be capitalism. Energy and Tech were the worst sectors while Industrials and Staples fell the least in a day when all sectors were red. India is putting up record breaking Covid case numbers while US now has a antibody resistant variant in Texas that hits harder and spreads faster.

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

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