Post Vacation Thoughts

Having returned from 2 weeks vacation there are many interesting things to focus on in the markets.

The key areas to focus on are:

  1. Global politics
  2. Central banks rate policy (should we care?)
  3. Stimulus developments
  4. Growth cycle status
  5. Earnings and valuation
  6. Inflation, transitory or ?
  7. Corona pandemic developments (priced correctly?)
  8. Charts

In an attempt to be succinct and knowing how people like to keep reading time down, I will bullet point my way through the above.

  1. Global politics

China/ U.S.  Taiwan, China Sea developments, Tech crackdowns, Mutual dependence

Iran vs Israel, Middle East, OPEC+:  recent flare up in Middle East could quickly escalate.

Iran vs U.S.

Ukraine conflict

For more:

2. Central banks

Smaller country and EM are in tightening mode while all eyes are on U.S.  We look for tapering warning in Q3, market thinks Q4

With rates low, seems it is all about the politicians and stimulus, taxes etc. which is the key focus for markets and economic growth.

3. Stimulus

Market counting on new impulses from the U.S. and globally to keep growth from slowing

In U.S. there seems to be some bumps in the road, watch the developments on debt ceiling in months to come. 

Should this expected infrastructure bill not come to fruition, market will not like it.

4. Growth

Latest GDP in U.S. was under expectations, China is in a slowing period.

Delta stubbornness showing up globally and although less deadly, causing issues for non vaccinated and may hurt travel, leisure sectors.

Are we headed back to 2%-3% or can we hold the 5%+ level into 2022?

5. Earnings and valuation

Q2 earnings have been impressive, comparisons with Q2 last year are a bit flattering. Can companies overcome supply chain issues, higher labor and input prices, combined with a uptick in virus?

Valuation I leave to others:

5 models outlined are all fairly valued to strongly overvalued.

6. Inflation

Bond market seems to be completely buying into Fed narrative as is the equity market. Transitory is the answer.

I am more skeptical and if we see a couple of strong employment reports next 2 months (July/August) combined with continued inflation above 4%, then the tone of the Fed will need to change.

Is bond market correct and growth will slow dramatically and bring inflation down with it….

7. Corona Pandemic

Overview on BBC website:

Summary: Asia looks a bit worrying with Indonesia, Thailand, Malaysia, Vietnam all hitting new highs in number of cases. Europe is looking pretty good for now, while the U.S. developments in both cases and deaths is turning higher and will cause increased restrictions.

8. Charts

While year to date global equities have been impressive, with the UK, DAX, Nasdaq, Dow Jones, S&P 500 all up between 10% and 15%, the past month has been quiet as expected and as market awaits the battle of low rates, and positive growth vs potential inflation and valuation issues.

Risk indicator overview:

AUDJPY has been trending lower since trading at the 85 level during May and June. Break of support at 80 is worth keeping an eye on!

US High Yield (HYG) ETF is holding near highs, a break below support at 86.60 and 85.65 will get our attention

The VIX index is holding the 20 level. Although elevated from the lower levels we saw in April, June and the middle of July, it is higher than we might expect given equities trading so strongly. Perhaps a bit of August and risk event hedging?

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