Mockdown to lockdown with Delta

The local market was hit hard from the start and recovered at the close to finish a negative red day similar to US markets overnight. 

The US market was bashed at the open and then recovered into the close on a gamma squeeze. 

European markets were hit harder. Asian markets were struggling as well. It is all about growth worries as inflation picks up. Size mattered in the index level, with large caps falling less than small caps. The energy sector was the only positive, while tech and retail were the worst red sectors.

Central Banks are continuously fudging the target for QE tapering, the rate hike cycle and balance sheet reduction. Even a primary school kid can deliver stimulus. The skill in governing is to deliver reform and structural changes to drive long term growth after the short term stimulus boost from the economic shock. If you don’t do that, you inevitably fall into a Japan-style Ponzi scheme of endless money printing and much shorter boom and bust cycles. 

The EU has followed Japan into the same mess. Overnight, the European Central Bank changed the wording around the inflation benchmark to basically not raise rates or cut QE for years - if not decades - to come. This is similar to when Japan entered the Ponzi scheme: banks in most EU member nations will not survive without the ECB printing endless handouts. The EU will gradually grind into a full socialism model where the ECB will end up indirectly owning control of the entire European banking system. It is the fiscal integration of the EU by stealth. 

The EU already has clocked a lost decade and is likely to follow Japan into another lost decade. The US is on the verge of falling into the same socialism trap. They have delivered historic stimulus funded by historic US Fed balance sheet expansion. The White House has to move on tax reform soon or the slowing economy will make it too hard. Then the US will be stuck on endless stimulus with no reform like Japan and EU. As the global currency, the US dollar will continue to depreciate with endless stimulus and drag the world into stagflation. The RBA has used the economy to boost asset prices and left the economy at the mercy of the global macro. What could go wrong? Time will tell.

On the COVID front, the NSW cluster started in Sydney' east and we did not follow the early sharp/short lockdown approach that has proven a successful strategy around Australia. The reason we did not follow the proven path is mainly political ideology. Everyone knows the Federal Government’s pandemic plan has been a debacle at every stage. The vaccine rollout is another layer of failure in planning and execution. NSW's blaming of the vaccine rollout is childish. The NSW government was always making decisions knowing that the vaccine rollout was not going to save them, and that this variant was much more dangerous both in its spreading capacity and ability to infect younger people.

Knowing all these facts in advance, the argument against a short/sharp lockdown in the Eastern suburbs when case numbers hit double-digits made no sense then and it makes even less now. 

NSW had been lucky in previous outbreaks. The health care workers saved the government from several childish mistakes that could have cost so many more lives than they did. The NSW government continues to make mistakes and its luck has finally run out. The so-called late “mockdown” has been another political-ideological strategy that has completely failed. The Delta variant of the virus has now spread to all parts of greater Sydney. The NSW government sudden adoption of a heavy-handed approach in South West Sydney is a classic victim-blaming move to deflect attention from its mistakes. We are moving from two weeks of mockdown to one week of lockdown, with all-time high case numbers for this cluster. 

It looks inevitable that the lockdown will extend to another week at least. The sooner we move past the political ideological nature of decision making and play defense, the sooner we can get some sort of normality. Vaccine rollout is months away. But I am not holding my breath.

Markets do not rise in a straight line and they do not fall in a straight line. The Coronavirus Delta strain is now the main variant in all major regions. 

The UK is planning to open up within weeks, while Delta is spreading like wildfire as they celebrate making the Euro final with a dubious penalty goal. The Euro parties may be the super spreader event that turns the tide. 

The US has the same problem,  but is dealing with substantial parts of certain states that do not want to get vaccinated for political reasons. Europe, Asia, Africa and South America are still stuck in their own pandemic waves. One of the main inflation boosters is the supply-side issues. Pandemic related issues are likely to keep the supply side disrupted well into 2022. 

It is logical to assume that rising costs will hit margins. We are already seeing signs that growth has peaked. Slowing growth and rising costs with a stagflation economic outlook just does not match up with historic high multiples. It’s going to be a few months of volatility ahead.

The main data points released in the last 24 hours…

Annual inflation rate in Brazil edged up 8.35% in June of 2021 from 8.06% in May, and in line with market forecasts of 8.4%. The inflation accelerated for the 13th consecutive month to the highest since September of 2016, due to the effects of the coronavirus pandemic. The biggest increases were seen in transportation (15.05%), namely fuels (43.92%); food and drinks (12.59 %); household articles (12.35%), namely TV, sound and computers (17.51%); and housing (8.72 %). On a monthly basis, consumer prices increased 0.53%, with housing recording the biggest impact.

In the US, 373,000 people filed for unemployment benefits in the latest week, above market forecasts of 350,000 and slightly higher than an upwardly revised 371,000 in the previous week, signalling the labour market recovery remains far from complete. Still, with the initial claims remaining almost double the 200,000 level before the coronavirus pandemic hit, employers have been complaining about the struggle to fill open positions, citing ongoing labour shortages due to enhanced benefits, concerns about contracting COVID-19 and finding childcare.

Continuing Jobless Claims in the US decreased to 333,900 in the week ending June 26 of 2021 from 348,400 in the previous week. It is a new pandemic low, although figures came slightly higher than market forecasts of 333,500.

Consumer Credit in the United States increased by $35.28 billion in May of 2021, the biggest increase ever and well above market forecasts of $18.4 billion. Non-revolving credit rose by USD 26.085 billion and revolving credit went up by US$9.196 billion. On an annual basis, consumer credit rose 10%, following a 5.7% gain in April.

China's annual inflation rate unexpectedly fell to 1.1% in June 2021 from May's eight-month high and market expectations of 1.3%, amid a sharp decline in cost of food (-1.7% vs 0.3 percent in May), as pork prices dropped faster. Meantime, cost of non-food goods were little changed (1.7 percent vs 1.6 percent), with prices continuing to rise for transportation & communication (5.8% vs 5.5%); clothing (0.4% vs 0.4%); rent, fuel & utilities (0.9% vs 0.7%); health (0.3% vs 0.2%), household goods and services (0.3% vs 0.4%), and education, culture (1.5% vs 1.5%). On a monthly basis, consumer prices unexpectedly dropped by 0.4% in June, the fourth straight month of decrease, after a 0.2% drop in May and compared with forecasts of a flat reading.

China's producer prices rose by 8.8% year-on-year in June 2021, after a 9.0% gain in the prior month and in line with market expectations. This was the sixth straight month of increase in factory gate prices, amid a further recovery in domestic production and rising commodity prices. Cost of means of production rose slightly softer (11.8% vs 12% in May), led by extraction (35.1% vs 36.4%), raw materials (18% vs 18.8%), and processing (7.4% vs 7.4%). Also, prices of consumer goods slowed (0.3% vs 0.5%), mainly due to food productions (1.4% vs 2.2%) and daily use goods (0.3% vs 0.5%), while both clothing (-0.8% vs -0.6%) and consumer durables (-0.6% vs -0.8%) fell further. On a monthly basis, producer prices went up 0.3%.

The British economy grew 3.6% in the 3 months to May of 2021, the strongest growth since November but slightly less than market forecasts of 3.9%. Strong retail sales, increased levels of attendance as schools reopened from March, and the reopening of food and beverage service activities drove the expansion. Considering May only, when indoor areas of hospitality venues reopened, the economy advanced 0.8%, nearly half of market forecasts of a 1.5% gain. Accommodation and food service activities grew by 37.1%; the production sector returned to growth (0.8%), mainly because of adverse weather conditions in May boosting output in electricity, gas and air supply. In contrast, manufacture of transport equipment fell by 16.5%, its largest fall since April 2020 as microchip shortages disrupted car production and construction fell for a second consecutive month by 0.8%. Still, the British economy remains 3.1% below the pre-coronavirus pandemic levels seen in February 2020.

Industrial production in the UK rose 0.8% month-over-month in May of 2021, following a downwardly revised 1% decrease in the previous month and compared with market estimates of a 1.5% gain. Increases were seen for mining & quarrying (3.8% vs -15.7% in April) and electricity, gas steam and air conditioning (5.7% vs 1.2%). Meanwhile, manufacturing activity went down 0.1%. Year on year, industrial output advanced 20.6%, following a downwardly revised 27.2% growth in the prior month.

Comments on US market last close…

US market was down on global growth worries. It was down a lot more before recovering through the day and boosted by the usual pump into the close. RUSSELL -0.94%, S&P -0.86%, DOW -0.75%, NASDAQ -0.72%. VIX jumps to 19. European markets were down mostly 2+%. Asian markets closed down around 1%. Yields were falling again with the US 10-year closing below 1.30%. Euro moved higher on ECB suggesting they are going to go full Japan Ponzi by allowing inflation to run with an average target of 2% with volatility. The US dollar moved lower with AUD-USD. Metals were lower but Gold ticked higher. Oil moved higher on weak inventory in the US. Property and Utilities were the best sectors while Banks and Tech were worst.

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