Corrective potential

The momentum of the global recovery buy-everything trade looks to be flagging in the near term, nudged along by worse than expected US Jobless Claims data overnight. Some doubts had been noticeable earlier this week, sparked by the significant move higher in US 30-year bond yields. Yields have done nothing since, and in fact, slipped slightly overnight, but that hasn’t stopped the wolves circling equity, energy and precious metals markets.

Interestingly, various asset classes seem to be going their own way now. The US dollar fell overnight, which in recent times suggested confidence in the global recovery. Bitcoin and other cryptos remain in tulip-mania heaven near their all-time highs. Base industrial metals are also holding up nicely. An ebbing of the Texas big chill seems to be weighing on energy markets more than a massive fall in official US crude inventories overnight.

Gold has been in trouble for some time, failing to rally whether US yields eased or the US dollar fell, but retreating as soon as the opposite occurred. It is perched on the edge of the abyss as the weekend approaches. Gold could fall to near USD1600.00 an ounce next week if a failure of USD1750.00 sparks a capitulation scenario. I am beginning to wonder if its inflation hedging role has been temporarily usurped by instant gratification, sure thing FOMO gnomes of the crypto world. As I have said, bitcoin is proving surprisingly resilient in the current climate.

The fall by oil overnight, which is continuing apace in Asia this morning, has surprised me, even though I have been calling for a correction pre-Texas. The US crude inventory data doesn’t capture this week’s massive drop in US extraction, refining and distribution, pointing to an even more significant reduction next week. The news that only 300,000 households with electricity in Texas now, instead of millions, seems to have been enough to spur profit-taking and a washout of very extended speculative long positioning. Brent may well trade below USD60.00 a barrel before it finds its mojo again.

Equities markets concern me the least. This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn. This week’s fall is minuscule compared to the scale of the overall rally since the start of the year. The rise in bond yields, and the ensuing inflation scaremongering, an excuse to take some risk off the table. Yield curves may steepen around the world, a pleasing development for the banking sector.

Still, there is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. Indonesia cut rates yesterday, and South Korea may well do the same next week. Evidence of two-speed recoveries abounds across the world, and it will remain awash in zero per cent central bank money through all of 2021. That will have to go somewhere, and a lot will head to the equity market. US 10-year yields will need to be approaching 2.0% to shake the foundations of that trade.

South Korean PPI and Japan Inflation rose by more than expected this morning, but much of the gains can be attributed to the rise in energy prices. Australian Manufacturing PMI outperformed, while Services PMI disappointed, as did Retail Sales. A similar story unfolded in Japan, with Jibun Bank Manufacturing PMI exceeding expectations while Services PMI disappointed.

We will receive a plethora of PMI data from Europe and the US today, mixed in with some inflation and manufacturing numbers. It will likely tell the same story—a recovery in manufacturing and export facing sectors, while domestic consumption remains cautious and muted. Inflation is cost-push and not a wage-price spiral, driven by higher energy and base metals and logistics squeezes. The former is transitory in inflation numbers, and with employment enormously lower still, than pre-pandemic, worries about the later are overblown.

We should get more confirmation of that next week with a torrent of pan-Asia CPI prints. Singapore and Malaysia will likely remain negative, with no inflation issues there. China, South Korea and New Zealand announce rate decisions. China will stay unchanged, but New Zealand could surprise on the dovish front in their statement, even if rates don’t move. South Korea may well choose to lop 25 basis points of their reference rate, dropping it to 0.25% as domestic consumption remains in a deep freeze.

Overall, the price action we see this week across various asset classes reflects how crowded the trades are and their respective stomach for risk, and not a sea change. The world is recovering in a two-speed fashion, and ultra-easy monetary policy will continue to be the one ring that rules them all.

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