Stocks markets are a “team” game

Strong PMIs send Nasdaq reeling

A few stories are circulating in Asia today to pique the market’s interest. Strong PMIs from the US and Europe overnight saw the cyclical rotation trade reappear in equities, with the tech-heavy Nasdaq tumbling 2.0%. Mainland China and Hong Kong tech listings opened much lower as well, with additional headwinds over a proposal for a joint venture with tech giants to jointly “oversee” consumer data.

The aggressive falls have suddenly mysteriously reversed, just as the Shanghai Composite approached its 200-day moving average (DMA). From over 2.0% down, the Shanghai Composite, CSI 300 and US 5-year note auction are now in modest positive territory, sparking speculation that China’s “national team” of government-linked investment funds are buying. Indeed, the price action suggests that “smoothing” is underway.

Secondly, it is being reported that the giant container ship blocking the Suez Canal has been refloated, although I have not seen it officially reported on any news wires. Oil prices have immediately dropped by over 1.0% in Asia, suggesting some truth to the story. Oil rallied spectacularly overnight on the Suez Canal story and robust US PMI data, and I would expect at least part of that premium to unwound.

Thirdly, Reuters is exclusively reporting that the US SEC is launching an inquiry into the SPAC IPO frenzy. I am not sure of the story’s ramifications as yet, but I felt that reports this week that WeWork was preparing to list via a SPAC at a USD9 billion valuation, must surely represent “peak SPAC.” You will remember, it’s the serviced office company with ping pong tables that all those clever finance people thought was worth USD50 billion less than two years ago. Perhaps the SEC agrees with me? My 30+ years of gnarled existence as a pilot fish in the financial markets has imbued an “if it’s too good to be true, it always is” mindset on me. SPAC-mania fits that bill nicely. Mind you, if someone is prepared to pay USD60 million for a non-fungible jpeg, then anything is possible. I do acknowledge that in the central bank-powered times of 2020/21, things can be too good to be true for longer.

Overnight, the US 5-year note auction was well received, with a 7-year auction to come tonight. Notably, even as yields fell, the US dollar continued to power higher, suggesting that those yield differential plays are now becoming good old safe-haven plays. The global risk appetite indicating Australian and New Zealand dollars have fallen deeper into downward correction territory. The Canadian dollar is very close to doing the same. Similarly, the S&P 500 is testing long-term support, with the Nasdaq having broken its longer-term support on the first day of March. The same picture is reflected across China indexes and the Nikkei 225, and I know I have missed a few.

Trouble is brewing, I suspect, and when looking for a spark, my eyes turn to US President Biden. The president is due to announce a preliminary outline of his follow-on USD3 trillion remake America package next week. Although taxes will rise on the wealthy and business, bond issuance will surely expand once again as well. That could be enough to spike US long yields once again, which may move equity markets out of marking-time mode and finally into downside correction mode. To be sure, it will be a bull-market correction, although it may be an emotional one. But worry not, the central banks have still got everybody’s back.

The Asian data calendar cupboard is bare today, with attention focused on US Initial Jobless Claims. After the surprise rise in US PMI’s overnight, a fall in Jobless Claims below 700,000 might just give the process outlined above a bit of a nudge.

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