Return of the king

Local markets squeezed out a slight positive day on low turnover with bond yields pulling back from the overnight peaks. US 10 year bond yield ran above 1.18% and then took a slide back to 1.12% while Aussie 10 year bond yield had similar trend but below US yields. Energy and Telecom sectors were the standout positive sectors while Staples joined the growth sectors in Tech and Health Care in the most negative sectors. USD looks over sold, US bond yields look over bought, US equities look over bought, Gold looks over sold, Pandemic risk looks ignored, Economic issues looks ignored while reflation and politics getting attention. Latest inflation data in the US will be out tonight and core inflation was 1.6% and expected to remain the same. That will not be the case in the next few months and bond market is backing that view as substantial money printing and currency debasement are on the “Blue Wave”.

The US Fed lead the chant globally for central banks that rates are not going up for 3-4 years. We heard the same mantra from ECB, BOJ and even RBA. In the last week US Fed presidents are already flipping on that. Atlanta Fed president has said in the last week that rates may go up as early as mid 2022 while Kansas City president overnight said inflation is going to up faster and earlier than expected. History has proven time and time again that central banks struggle to balance weak economic recovery and reflation. We may be repeating the same cycle again. Bond market follows the inflationary outlook and central banks are then dragged kicking and screaming. US Fed outlook for inflation is already above 2% and the Fed presidents are kicking and screaming. US inflation update tonight. Enjoy the low number as it is going to move dramatically in the next 2-3 months as depressed prices from last year come into play. Vaccine will also push up depressed travel and service linked prices. We may be looking at 2-3% bond yields in Q3 and even 4-5% by year end. Not sure asset bubbles can handle that. Ignoring cycles have not been a good strategy!

US market last close > US market was squeezed a slight positive day with Russell ripping higher on reflation. Bond yields moved 4bps up and then back down. USD was slightly weaker and that drove commodities higher. Growth to value rotation keeps playing out and market still trying to pick the dips in growth. Pandemic running wild in EU and Asia. Germany talking about extending lockdown to April while Japan has it’s own new variant, Korea is blowing up and China is locking down areas. Vaccine is seen like a switch to return to pre pandemic which unlikely to be the case. Investors are ignoring the fact that US and Europe were heading to recession and China was driving global recovery pre pandemic. Even if vaccine flips the clock back to pre-pandemic time, US is still stuck with endless money printing and currency debasement delivering rising inflationary pressures.

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

Not already a Livewire member?

Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.