A minor tantrum

Financial markets experienced a minor taper tantrum overnight, although my mother, having endured years of bringing up a highly-strung devil child, would even rate it as a minor flesh wound. Equity markets retreated overnight, and the US dollar rallied, as the FOMC didn’t assuage the normalisers and Boeing’s poor results sparked a rush for the door. US bond yields also edged lower surprisingly, suggesting that much of the overnight price action was haven related as no one wanted to be holding stocks when the music stopped.

US equity markets had their biggest fall in 3-months, falling over 2.0%. Even stellar results from Apple and Facebook couldn’t lift the malaise. Much of that was probably due to their outlooks, with Apple declining to offer 2021 guidance and Facebook highlighting regulatory risks and the challenges of repeating 2020’s growth. Tesla missed earnings expectations and declined to provide a guess at how many cars they would deliver in 2021, which is fair enough, as they never seem to hit it and investors don’t seem to care.

FOMC says no tapering in QE

The FOMC left rates unchanged as expected but downgraded their outlook due to vaccine delays and risks. Chairman Powell said afterwards that a reduction in quantitative easing was not even a conversation worth having as yet. That is entirely consistent with the Fed’s lower for longer mantra, but it seems that the market was looking for something more concrete. Disappointed inflationista’s headed for the exit to lick their wounds, although frankly, they should have expected nothing less from the Fed.

The overnight moves have everything to do with positioning and a loss of momentum, than a structural change. Since March of last year, markets have been long equities, and short of US dollars to the eyeballs, floating on an ocean of central bank largesse. The dollar rally was confined to the G-7 and commodity currencies, as Asian EM has hardly budged. Notably, neither oil nor precious metals have moved much either. The price action suggests that the moves overnight are merely corrective and not the end of the buy everything trade. That would be a well overdue development, and in the currency developed market space, could still have further to run looking at the charts this morning.

That will mean that US Q4 GDP and Initial Jobless Claims will assume greater importance this evening. If Q4 QoQ GDP prints under 4.0% or Initial Jobless Claims rises over 900k, we could see another move lower in equity markets and more US dollar strength. That said, salvation could come in the shape of Johnson & Johnson. Dr Anthony Faucci saying overnight he expects the initial Covid-19 vaccine results this week. With vaccine deployment running into logistical problems in the US and Europe, J&J could spur renewed antibodies as it is a one-shot vaccine. Something logistically that the world desperately needs.

Finally, I have had a packed media schedule this morning. With a face made for radio and a thick Kiwi accent, it is always a pleasure when a small queue forms to hear the words of the voice of reason. Today, front and centre, has been GameStop and the army of retail Redditinators giving Wall Street some of its own medicine allegedly. I’ll not dwell on whether it is beginners’ luck or a digital “Money Heist” on steroids.

The Redditinators have been with us in force since March of last year. The democratisation of access to the financial markets through technology is a real super trend. The FOMO herd will continue to storm the Bastille gates because they rightly feel that they to should be allowed to eat cake. Regulators should tread carefully in making “orderly market” decisions. I say this because for every angry peasant buying a call option, a nobleman makes a market and sells them those call options. I hear no stories of woe from the delta-hedging gentry regarding GameStop or AMC.

CEO’s should also note that it works both ways. Cromwell’s Redditinator army can just as easily buy put options as they can call options. Snouts in the bonus and “incentive plan” trough, insensitive comments, or some other perceived corporate injustice could well find the army camped at their gates, waving put option sabres. We may well be entering a new age of corporate governance enforcement with summary justice that would make Chuck Norris smile. (Sorry Mr Norris, I didn’t mean to say you smiled, please don’t hurt me.)

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