Please, sir, I want some more

Mathan Somasundaram

Deep Data Analytics

Local market was bashed on solid turnover as global asset allocation move from equities into bonds were in play as risk off trade took over post US Fed update. Markets in all regions were painting red with average 2% falls. USD jumps on risk off trade and Bond Yields fell as money jumped from equities to bonds. Rising USD and weak China seasonal demand for commodities were hitting AUDUSD. Global passive investors were selling into weakening AUDUSD. Apple, Facebook and Tesla result were after market and US futures have moved in to the red. US Fed basically repeated the ECB comments. Downgrade growth, elevated risks and will step up when it blows up. Inflation and virus are out of their control. US Fed is clearly changed their tune from pumping Wall Street under Trump camp to supporting Main Street under Biden camp. Have we started the sell off cycle as earnings reality, virus damage, reflation and lack of excess stimulus starts to bite the structurally challenged economy? Time will tell.

US market has been performing like a sprinter on steroids. Excess liquidity, government handouts and cheap cost of debt has driven massive bets on index options and margin lending into equity markets. The US Fed has just pulled the rug from under the markets and the panic has started to hit investors. VIX is break bad as markets throw a tantrum for not getting more stimulus from the US Fed. US Fed under the new administration are not beholden to the markets but to the economy. Markets went up at the cost of the economy and that is about to reverse. Like scene from Oliver Twist… markets looked up at US Fed last night and said… “Please, sir, I want some more” and they were left disappointed.

US markets were pricing in never ending stimulus upgrades and low rates forever. Now the Central Banks are changing their tune as they have lost control of inflation. USD debasement is not if but by how much. Budget deficit was already set for years and now may be for decades. Funding those deficits means even more bond issuance are coming to the market to push yields higher. Falling USD, minimum wage, higher costs of inputs, higher costs of transport and higher tax rate means inflation will get booster shots from everywhere. US will start to also cycle very low prices in the next 3-4 months and that will boost inflation measures. Bond yields will fall in equities selloff but then it will run. The currency wars are back and get ready for reflation after sell off!!!

China has been taking the foot off the stimulus pump gradually over the recent months. They slowed down the steel sector and tightened the lending into property market. They are having new waves of pandemic while moving into New Year holiday period when things slow down. Even commodities are likely to see some weakness in the short term as demand fades as Chinese gradually shut down for holiday cycle.

Comments on US market last close > US markets were hit hard with major indices down over 2% with weak earnings and US Fed updates. It was down nearly 3% before recovering into the close. EU markets were hit before as growth slows with lockdown issues. US Fed basically read from the same book as ECB... lower growth, higher risks and will stay on hold till it all improves... but clear to see both can't manage virus or inflation. US Fed said recovery will be slow and ECB. Markets have priced in quick fix and more stimulus to top end...looks like that ain't happening. US Fed will now favor Main Street over Wall Street under the new administration. VIX popped 40% and the risk off trade pushed bonds and USD higher while commodities were lower. S&P has turned negative for 2021 and expect more risk as China slowdown for holiday period ahead. Retail, Banks and Health Care were the most hit in a red day. Market starting to pay attention to tax agenda under new administration and gamma squeeze in crowded trades. Market valuations can't hold without excess stimulus when growth gets downgraded. Aussie gold miners looking good for margins as AUDUSD fell twice as much as Gold.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle’s going to get bumpy!!!

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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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