Stimulus nerves sweep markets

Equity markets drop over stimulus rumblings

If financial markets needed any further confirmation that the US fiscal stimulus was the only game in town, the buy-everything herd received it overnight. Senate Republicans expressed disquiet over the size of the proposed USD1.9 trillion bill. That dose of reality was enough to knock equities off their intraday highs, bond yields to fall and send investors scampering back into US dollars.

Admittedly, the news came as equity markets had become extended in the shorter horizon, with the buy everything trade in full cry. Yesterday in Hong Kong, Chinese mainland retail buyers continued their tech-buying frenzy, sending Tencent to a near USD1 trillion valuation. There was some gob-smacking price action in the options market as well. With Asian markets set to retreat this morning, the reaction in Hong Kong could be outsized.

Still, with markets in the US and China being powered by gossip on internet chatrooms and overwhelming fundamentals through sheer weight of numbers, it would be dangerous to call markets a bubble or say “peak-retail” just yet. I will paraphrase sage advice from John Maynard Keynes (or maybe it was Gary Shilling, there is some debate), economists from the time when economists spoke to people using words and not calculus. “Markets can stay irrational longer than you can stay solvent.” You Reddit here first.

With the retail herd in control of key stock markets worldwide, data releases elsewhere are somewhat reduced in relevance. South Korean Advance Q4 GDP outperformed this morning, reinforcing that it will emerge from 2020 about where it started, a marvellous result by any standards considering. Like Japan, its Achilles heel remains consumer spending, although it is being swamped by its export machine’s noise.

The rest of the day’s data calendar is second-tier, with Singapore’s volatile December Industrial Production data expected to retreat slightly from the impressive climb in November. The UK employment data dates back to October and November, rendering it irrelevant in the context of life in 2020/21. US housing data will continue showing herd immunity to Covid-19, thanks to bottomless amounts of free money from the Federal Reserve.

If the US stimulus package is the only game in town, the Federal Reserve FOMC meeting this week is an underreported and underestimated risk point. Suppose noisy stimulus resistance from Senate Republicans increases, undermining the herd’s key buy everything premise. In that case, an FOMC press conference that is not suitably uber-dovish could administer the coup de gras to the rally.

If Jerome Powell doesn’t release more doves than a Greenpeace convention, putting the early tapering noise to bed, he could have a mini taper-tantrum on his hands. The US dollar and US bonds would be obvious winners. Emerging markets, equities and precious metals the losers. Cryptos are unlikely to be spared either. The “institution experts” calling a 20+% fall in digital Dutch tulips a “healthy correction,” may have to change that to a 50% correction is “healthy,” while keeping a straight face.

Still, if Mr Powell lets the doves fly, it will be business as usual with markets myopically fixated on US stimulus progress. And no, I am not calling the top of the market for equities. A 10-15% correction would be welcome, but global monetary policy means asset price appreciation remains front and centre for 2021.

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