Is The Bond Market the Equity “Tell”?
Happy Friday,
Many have noted that the bond market is not confirming the sharp equity rally. What if it's about to? On Bloomberg earlier this week with Jon Ferro (Link) who noted we might be early on this non consensus call.
Oil has bottomed (noted 2 weeks ago), global economic activity too (today's UER in rear view), re openings occur without Covid-19 outbreaks, BofA notes 80% foresee U/W, headlines scream deflation.
Forthcoming UST supply will be huge & focused on the long end as the Treasury reintroduces a 20 yr bond. Next week’s $96B of long dated supply will give a signal.
Fed pins the short end & even if Fed Futures forecast of negative rates is wrong (thru Jan 22) & it will be wrong, further YC steepening seems likely. A 1% 10 yr doesn't seem like too much of a stretch, does it?
What are the Cross Asset implications? More support for equities, even up here at 2900, helps Financials which helps the Value Factor & Cyclical sectors catch a bid which in turn helps the equity market advance broaden out. Tech has been a huge winner from collapse in long rates as it supports ever higher valuations on future CF. That prop may pop. Recall our long standing focus on possible new leadership? Pay attn here - we remain with a Tech - Value Bar bell.
Commodities should do well - still down 40% ytd. The USD might weaken - already showing signs - A$ strong last month, A$/Yen cross threatening to break out (global growth indicator). $/Y down 5 weeks in a row - longest losing streak in a decade. Good for Gold/miners.
Our 2020 Outlook, written last December, was titled: Reflation 2020. It may still turn out right. China’s reopening is picking up steam: April car deliveries to dealers up Y/Y, Disney Shanghai reopening with tx sold out in minutes (and yet the US can't decide if it will have Fall football season - ugh).
Oil bottom, broad commodity price bottom, meat shortages (US wholesale beef prices +100% y/y), supply chain interruptions, US - China trade tiff, global money spigot turned full on… who's to say inflation won't return - certainly not me (TIPs).
What else? Brazil, my old stomping grounds (launched a Brazil Fund way, way, way back in the day) sees its FX blow out… Do you know what LatAM equity represents as % of ACWI? Blow your mind: less than 1%... yes less than 1%. Wait for MOF Guedes to make his move before stepping in.
Reopenings are key: No 2nd waves/outbreaks in China, Taiwan, Denmark, Austria, Germany. Schools reopening, manufacturers up & running. Watch next 2 weeks for any virus fallout from China Labor Day vacations (115M domestic tourist trips); Beijing now telling its residents to STOP wearing masks outdoors.
US re opening underway in the chaotic nature which has symbolized the Trump Admin response to the entire situation. Good news: CA reopening its manufacturing base, Michigan its auto plants. Bad news: still not close to national testing - tracing levels needed; over 50% of states reopening don't meet Federal guidelines to reopen.US re opening riskiest yet.
Have thought China could be a test bed for the US as we follow in the footsteps of those ahead of us in the re-opening queue but starting to think that's not right - China has stomped out Covid-19 almost completely with only a handful of new cases every day… US cases still well over 20k PER DAY.. China can reopen Shanghai Disney & have thousands of folks there. Doing the same in the US seems foolhardy.
The Tri Polar World implications of Covid-19 continue to manifest: from supply chain regionalization to travel- tourist bubbles ( China - SK, Aussie-NZ) and beyond. Our TPW framework remains robust as does our Global RIsk Nexus (GRN) work which helped identify speed in all its manifestations (with science to come) as key to understanding/investing in the Covid Age.
Stay Frosty My Friends.
TPW Investment Management