There is no easy fix for bad management

Mathan Somasundaram

Deep Data Analytics

Local market ran into choppy day with profit taking from global investors and buying from the local investors through the day. We continue to see a lot of tax loss selling turning into month end window dressing as seen from share price moves on no updates. Global investors keep selling in recent days on USD bounce worry. Mid Caps went from the best yesterday to the worst today. Small Cap fund managers were back in the market buying ahead of the month/quarter/year end next week. Retail investors were also targeting tax loss over reaction and buy the dip in growth. Time will tell if these strategies will work in the medium to long term. Staples and Tech were the best green sectors while Health Care and Energy were the worst of the red sectors again. It was another lower than usual turnover day. Covid cluster is growing in NSW while cases are popping up in VIC and QLD. Private schools are in holiday and the public schools will follow soon. Parents are taking off on holiday ahead of potential lockdown in NSW. Market is mainly on autopilot with global investor trades setting the overall trend.

HOLIDAY SHUTDOWN >>>> NEXT SUNSET STRIP ON MONDAY 5TH JULY

The market is confused on the US Fed talk and walk. They talk hawkish by starting the conversation about rate hike cycle but then they run off to delusional dovish state to keep markets happy. It is almost like a teenager avoiding the obvious cycle coming towards them. The shocking update overnight was from Fed president Bostic saying inflation is stronger and likely to be elevated for longer. He moved his elevated inflation timeline from 3 months to 6-9 months. Given that 6 months of negative growth is a recession, 6-7 months of elevated inflation is going to play havoc with corporate earnings and consumer spending. The markets and US Fed seems to be absorbing that risk relatively well. If history is anything to go by, when economic data starts to fall…it may dawn on the markets that stimulus is going to be cut…not added.

Australia has given up a massive global advantage in managing the pandemic. Instead of taking advantage of the situation, we just kept making mistakes after mistakes in border controls and vaccine rollouts. Australia has gone from the lead pack to the underperforming pack. 

The vaccination rollout on the major developed nations have surpassed Australia to such a level, their tourism and travel industries are running at all cylinders. We may be dealing with clusters but our online retail providers work in a global market that is leaving Australia behind. The turnaround in global travel and online booking agencies are likely to deliver upgrades to come.

There are big moves being made in the gold market recently and that may have something to do with Basel III changes. Instead of making my own case, I took this segment from Kitco News article by Anna Golubova to give a quick summary….
The risk with Basel III is a major shift towards allocated gold, which could trigger a liquidity squeeze in the physical metal and lead to higher prices by the end of the year, according to Goldex CEO Sylvia Carrasco. The impact of the Basel III agreement, which will come into force on June 28, 2021, for European banks and on January 1, 2022, for British banks, is being debated by many gold industry experts, with opinions ranging from "everything will change" to "no impact at all." Carrasco is in the camp that sees many people underestimate the impact of Basel III on the gold market. "Basel III will affect the gold price more than many people believe. The spot price will definitely go up," Carrasco told Kitco News.
Basel III is an internationally agreed-upon set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. Many of the measures deal with bank capital adequacy, stress testing, and market liquidity. One of the biggest changes for gold is that the precious metal is being reclassified from a Tier 3 asset, which is the riskiest asset class, to a Tier 1 asset, which is currently designated for cash and currencies. The change could make it more expensive to buy and sell unallocated gold.
This is because Basel III includes the new Net Stable Funding Ratio (NSFR) requirement, which specifies that an 85% Required Stable Funding (RSF) needs to be held by banks against the financing and clearing of precious metals transactions. This is a big change from the pre-Basel III level of 0%, and it makes holding unallocated gold more expensive by equating it to the same level of risk as holding equities. "Basel III requires banks or dealers to collateralize 85% of the value of their unallocated gold with a Tier 1 asset, which is cash," Carrasco said.

Let us run through the main data points released in the last 24 hours…

The IHS Markit Eurozone Manufacturing PMI was unchanged at a record high of 63.1 in June of 2021, the same as in May and above market forecasts of 62.1, preliminary estimates showed. Output increased for the twelfth month with the rate of expansion picking up again, albeit remaining slightly below March’s record high. Production growth was again sharpest in Germany, with France lagging the rest of the region amid a slower rate of new order growth. Also, the rise in employment was the highest since 2018 and rising backlogs of work were accompanied by widespread supply shortages for many inputs. Manufacturers reported a lengthening of supply chains that was only slightly less marked than the 24-year survey record seen in May. On the price front, both input and output costs rose at record rates.

The IHS Markit Eurozone Services PMI rose to 58.0 in June 2021, from 55.2 in the previous month and well above market forecasts of 57.8, a preliminary estimate showed. The latest reading signaled the steepest pace of expansion in the service sector since July 2007, due to the easing of coronavirus-induced measures in many eurozone member states, notably in hospitality. In addition, services exports increased the most since at least September 2014, when data were first collected, while employment growth rate was the strongest since 2018 and backlogs of work rose the most in over two decades. On the price front, average input cost inflation was the highest since July 2008 and average prices charged for services rose the most in 20 years. Looking ahead, business confidence improved.

Fixed 30-year mortgage rates in the United States averaged 3.18% in the week ending June 18 of 2021, up by 7bps from the previous week.

Mortgage applications in the US were up 2.1% in the week ending June 18th, following a 4.2% rise in the previous week, data from the Mortgage Bankers Association showed. Applications to refinance a home loan were up 2.8% and purchases increased 0.6%. The average fixed 30-year mortgage rate jumped by 7 bps to 3.18 percent, rising from a 5-week low of 3.11%.

Retail sales in Canada fell 5.7% over the previous month in April of 2021, above forecasts of a 5% decline. It was the first decrease in retail activity in three months and the steepest since April of 2020, amid store closures due to the third wave of the COVID-19 pandemic. Sales fell in 9 of 11 subsectors, representing 74.2% of retail trade, mostly at clothing and clothing accessories stores (-28.6%) and general merchandise stores (-8.1%). Also, sales at building material and garden equipment and supplies dealers declined for the first time in nine months (-10.4%). About 5% of retailers were closed at some point in April, compared with approximately one-third of retailers being closed at the same time last year. The average length of the shutdown was one day, compared with eight days in April 2020. Preliminary figures for May suggest retail sales likely fell 3.2%. Year-over-year, retail sales jumped 56.7%, primarily due to last year's low base.

The IHS Markit US Manufacturing PMI jumped to 62.6 in June of 2021 from 62.1 in May, well above market forecasts of 61.5, preliminary estimates showed. The reading pointed to another record growth in factory activity amid further easings of COVID-19 restrictions. Output and new orders continued to rise sharply although supplier delays and difficulties finding suitable workers weighed on production. Average supplier delivery times lengthened to the greatest extent on record by some margin. Despite a substantial rise in backlogs of work, employment growth slowed as firms struggled to find staff or entice workers back to employment. On the price front, input inflation accelerated to a fresh record amid broad-based raw material price hikes. Firms raised their selling prices at a quicker rate in an effort to pass on these higher costs, with charge inflation also surpassing all previous records. Finally, goods producers expressed a greater degree of confidence in future output.

The IHS Markit US Services PMI dropped to 64.8 in June 2021, from the previous month's all-time high of 70.4 and below market expectations of 70.0, a preliminary estimate showed. Still, the latest reading pointed to the second-sharpest expansion in the service sector since data collection began in October 2009, amid rising customer demand as pandemic restrictions eased further during the month. Growth rates in both new business and export remained strong, while struggles among companies to find suitable workers hampered the pace of job creation. Meanwhile, pressure on capacity was reflected in a solid rise in backlogs of work. On the price front, cost burdens increased at the second-fastest pace on record, boosted by wage costs and additional transportation fees. Similarly, output prices rose markedly as firms sought to pass on greater input costs to clients. Looking ahead, business optimism eased in June, amid concerns over the impact of rising inflation.

Sales of new single family houses in the US sank 5.9% month-over-month to an annualized rate of 769 thousand in May of 2021, well below forecasts of 870 thousand. It is the lowest reading in a year as high prices due to rising material costs weigh on buyers' affordability. Sales sank 14.5% in the South and were flat in the Midwest. In contrast, increases were seen in the Northeast (33.3%) and the West (6.7%). The median sales price increased to $374,400 from $317,100 a year earlier. There were 330 thousand new home sales available on the market, higher than 315 thousand in April.

Consumer Confidence in South Korea increased to 110.30 points in June from 105.20 points in May of 2021.

Comments on US market last close…

US market was slightly weaker despite solid EU PMI and the dovish US Fed updates. DOW -0.21%, S&P -0.11%, NASDAQ +0.13% and RUSSELL +0.33%. VIX slides more to low 16. More Fed talkers overnight with Bostic flagging transitory inflation is going to remain higher for longer than expected. He is moving from higher for 3 months to somewhere between 6-9 months. Just for context, 6 months of negative growth is a recession. EU markets were all covered red overnight. Yields recovered some space with USD but commodities moved higher as well. Non correlated moves by correlated assets are the signs of excess stimulus. Things are a mess when Tesla is up 5.3% and yet the market barely moved. Retail and Banks lead the greens while Utilities and Staples were the red laggards. Gold pullback in recent times against falling yields are more likely to be driven by Basel III changes and that should unwind positively in the next few weeks. It is clear that all central banks are going to chase inflation and history shows they get it wrong.

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

(VIEW LINK)


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Mathan Somasundaram
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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