Short term growth - inflation pop before the stagflation risk takes over

The local market started up and held on for another low turnover positive day. That’s five straight low turnover days, but at least local fundies joined the market today by boosting small and micro-caps for the month/quarter-end. 

Global investors moving passive money have been the main players in our market all week and today was no different. Telecom, mining, tech and energy were standout best sectors while health care, industrials and property were the laggards. There are some global macro moves in play and Australia is a pawn in the big moves. Quarter-end asset allocation took a breather today and bond yields were climbing again. COVID-19 issues are rising globally and the EU is moving to stop exporting vaccines as pandemic wave 3.0 bites. China continues to tightening and geopolitics are getting more aggressive. The US continues to pressure China-listed companies and they are returning the favour to some US global businesses in China. Australia is in the crossfire after taking an active role in supporting the US over China. 

There are some weak leading indicators that are starting to show high risk:

1. USD index breaking above the 200-day MA 
2. Shanghai Composite broke below the 200p-day MA, and bounced 
3. CNYUSD (Yuan to USD) broke below 100-day MA 
4. AUDUSD moved below 100-day MA 
5. NASDAQ is right on its 100-day MA, after moving below and bouncing back recently.

The market consensus view is for a big single-digit growth figure to come through in the next two quarters as the world cycles weak data. 

Central bank grapples with supply-side concerns

Central banks do not want the markets to panic and they want investors to assume that you can get big growth and sustain above-trend growth without the same happening to inflation. We are in a reflation cycle and central banks want the market to assume that the economy will grow fast and yet manage low inflation and create jobs and absorb higher taxes while capex outlook keeps falling and supply-side issues keep rising. The producer price for input prices around the major regions are all rising even faster in the last two quarters than previous quarters, while supply-side delays are continuing to get worse through the year. We need to see a dramatic change in the supply sides and capex cycle to make the central bank balancing act work. Historical high growth in buybacks and corporate debt deleveraging cycle suggests we are not going to see that. The risk-weighted outcome is likely to be inflation outstripping growth in the medium term and US moves into stagflation. Time will tell!!!

That leads to my next most overused point in the market...“there are truckloads of cash sitting on the side lines”. 

The data shows global equity inflows this year were larger than the aggregate flows over the previous 18 years. 

There was a lot of cash sitting on the sidelines but they are mostly in the market now. Fund managers do not earn fees holding massive cash positions. The pressure to chase a rising market has been a clear motivator. FOMO and cheap money make investors take risks that they would normally avoid.

Comments on US market last close

US market turned a negative 300 DOW to finish up 200 points on opening up optimism or more end of month/quarter window dressing driven by massive buyback growth. RUSSELL lead with +2.65%, then DOW +0.62%, S&P +0.52 and NASDAQ +0.12%. USD higher and that hit all commodities. Bond yields are climbing again. Banks and Industrials were the best sectors while Tech and Health Care were the laggards. Even EU markets took a day off from sliding despite Covid rampant and vaccine wars. Shanghai composite has broken below the 200-day MA for the first time since the pandemic while AUDUSD broke below 100-day MA for the first time in five months. Suez Canal problems to add to higher costs. Markets are flip-flopping between opening up optimism and reflation pessimism. Expect asset allocation trades to continue into early April.

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

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