You cannot beat the herd by running with it

The local market started positive before fading into negative territory on low turnover. We have started the 11th consecutive week of aggregate weekly turnover below $40 billion. Healthcare and Miners were the best green sectors while Energy and Tech were the worst red sectors. The US market is closed tonight for the Memorial Day long weekend. China data shows its economy is growing and the government is managing it lower. US data showed inflation is higher than expected. Markets are starting to consider the likelihood of the US Fed tapering sooner rather than later. Month-end window dressing is over while tax loss selling will pick up pace in the pullback cycle.

USD Index is about to break another short term down trend. Market worries are rising with more global pandemic lockdowns, new variants in Emerging Economies, USD debasement and rising inflation. Historical trend suggests USD breaking short term down trend drives market profit taking cycle. Time will tell if this time it is different…probably not!

We are heading into a key period over the next two weeks where substantial economic data will be released in the US. If the trend is your friend, USD is showing warning sign despite US Fed using QE for yield control. Market may be aware of the inflation risk but that does not mean it’s priced for that. 

Finance markets are caught in the “Lance Armstrong Syndrome”. Everyone in the finance industry (i.e. Central Banks, Governments, Regulators, Rating Agencies, Asset Consultants, Brokers, Fund Managers and Corporates) benefit from pumping asset bubbles. Even in a crash, most benefit at the expense of the investors. It is in the benefit of the investor to protect themselves or end up funding the industry cycles. You cannot beat the herd by running with them. Manage risk better than the industry or you will make the same mistakes!!!

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

The consumer confidence indicator in the Euro Area was confirmed at -5.1 in May 2021, up for the fourth month in a row to the highest level since October 2018 supported by the gradual reopening of the economy and the acceleration in the COVID vaccination pace. There was an improvement in all its four components, i.e. views on their household’s past and future financial situation, their expectations of the general economic situation in their country, and their intentions to make major purchases.

The goods deficit in the US shrank to $85.23 billion in April of 2021 from an upwardly revised record $91.98 billion in March. Exports rose 1.2% to $144.7 billion, as strong sales of capital goods (4.8%) and industrial supplies (1.7%) partly offset an 8% plunge in those of autos. Meanwhile, imports fell 2.2% to $230 billion, amid lower purchases of consumer goods (-4.2%) and autos (-3.5%).

The University of Michigan's consumer sentiment for the US was revised slightly higher to 82.9 in May of 2021 from a preliminary 82.8, matching market forecasts. The reading still pointed to the lowest consumer confidence level in 3 months, amid falls in both current conditions (89.4 vs 97.2 in April) and expectations (78.8 vs 82.7). Meanwhile, inflation expectations remined elevated for the year ahead (4.6% vs 3.4%) and the next 5 years (3% vs 2.7%) . "It is hardly surprising that the resurgent strength of the economy produced more immediate gains in demand than supply, causing consumers to expect a surge in inflation. Record proportions of consumers reported higher prices across a wide range of discretionary purchases, including homes, vehicles, and household durables - the average change in May vastly exceeds all prior monthly changes".

Core PCE prices in the US, which exclude volatile food and energy cost, increased 3.1% yoy in April of 2021, following an upwardly revised 1.9% gain in March and compared to market forecasts of 2.9%. It is the highest rate since the 1990s, bringing it well above the Fed’s 2% target. Still, Fed officials have been reiterating such price pressures including fiscal stimulus, supply constraints and rising commodity prices are transitory. There is also a low base effect from last year weighing as the coronavirus pandemic dented economic activity and lowered prices. On a monthly basis, core PCE prices went up 0.7%, higher than forecasts of 0.6%.

The official NBS Manufacturing PMI for China unexpectedly was at 51.0 in May 2021, compared with market consensus and April's figure of 51.1. This was the lowest reading since February, amid intense inflationary pressure and supply bottleneck. New orders grew the least in three months (51.3 vs 52.0 in April), export sales shrank for the first time since February, while employment fell for the second month in a row and at a steeper rate (48.9 vs 49.6). Also, suppliers' delivery time lengthened (47.6 vs 48.7). On the cost front, input prices surged (72.8 vs 66.9), while selling prices went up sharply (60.6 vs 57.3). Meantime, both output (52.7 vs 52.2) and buying activity (51.9 vs 51.7) grew further. Looking ahead, sentiment weakened to a four-month low (58.2 vs 58.3).

Comments on US market last close…

US market started positive and faded into the close to finish mainly flat after PCE inflation data beat expectations on nominal and core basis. DOW +0.19%, NASDAQ +0.09%, S&P +0.08% and RUSSELL -0.18%. Market was supported by pull back in yields. It smells too much like jammed up QE by US Fed to run market protection. Gold moved from being down to up on negative real yields. It is funny how everyone wants to ignore high inflation for more than 6 months as transitory but negative growth for 6 months is recession and that is scary. We are in asset bubble protection game and inflation is going to get messy and real growth is going to keep falling in H2. USD ticked higher with bonds, gold and copper while oil was lower. Property and Utilities were the best on yield slide while Retail and Miners were the laggards. Gold sub sector is moving Costco update showed inflation is everywhere. New budget plans are adding more spending, more debt and more taxes. US had the month end pump today as it goes into long weekend... closed Monday for Memorial Day. It is clear inflation is going higher and yields are being managed lower. Gold will do well in this cycle. History suggests that at some point soon the dam will break and asset prices get hit to stop hyper inflation. Risk management is going to be bigger than stock selection during this period.

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