As The Tri Polar World Turns: Approaching The Turn
690 words – a 3 minute read.
EXECUTIVE SUMMARY
Recent risk asset volatility has served to discount the Delta variant spread and China equity takedown. This “pothole” market lends itself to a focus on technical levels across assets.
Key tactical issue remains the Delta spread vs the vaccine production and vaccination surge. With 33mspd, the bulk of the global population can be inoculated by Q2 2022; in the interim the Delta cycle is so fast that cases should peak in the coming weeks in the US, as it already has in the UK.
The shift from staggered reopening to a synchronized global expansion sets the stage for a turn to higher DM rates and another up leg for the Cyclical – Value segments of the US equity market and the more Cyclical non US equity markets, Commodities etc. With US growth stocks that rise with rising UST prices (falling yields) at their most expensive vs the broad market in nearly 50 years, the stage is set.
CLIMATE
With extreme weather events happening near daily across the globe the need to focus on climate has never been more visible to more people at the same time. This will drive further political & policy action as personal engagement drives political action and that drives policy.
ECONOMICS
With Europe and the US having vaccinated over 60% of their adult population and China reporting under 100 cases per week the bulk of the global economy is walled off from Delta.
Q2 data coming through supports this thesis with BTE data across DM’s from US to Europe and even Japan. IMF’s recent upgrade of DM 2021 GDP forecasts to 5.6% (EM at 6.3%) reinforce this sense while its global inflation forecasts of 2.4% this year and roughly 2% next should alleviate concerns over significantly higher inflation.
POLITICS
China’s takedown of its fintech, data and educational companies has spooked markets and left many questions in its wake. The shift in focus from software to hardware, to data security and to supporting family expansion are all arguably strategic in nature and support the idea of China developing Socialism with Chinese characteristics not capitalism.
One wonders whether the US – focused on many of the same issues of anti trust, privacy and social equality - will move in the same direction albeit without the ruthlessness shown by China.
POLICY
While more edicts may be forthcoming in China the bulk of the market impact has likely already been felt. Expect more Govt action to explain and clarify with the PBOC in reserve should more support be required. The idea of a Chinese devaluation seems unlikely.
The Fed continues to edge toward tapering – the schedule seems pretty clear – announce in Sept, implement in Q1 22 and operate through the year. The forward movement of the Biden infrastructure package is welcome as is the potential for above trend growth across the DM.
MARKETS
Bubblet popping and stealth corrections enables the global equity bull market to roll on, supported by surging earnings. The bulk of the China drawdown is over, even if the edicts are not.
We look for a turn in focus away from Growth back to Cyclical and Value segments and non US markets which have already undergone pullbacks and are poised to move higher with a turn up in Rates. Such a rate nove could be catalyzed by a monster jobs #, further success on the Infra plan or even the Fed’s taper announcement.
We remain UW Fixed Income and OW Commodities and expect to see a turn lower in the USD which should support both Commodities and parts of the EM. Broad commodities just hit a 6 yr. high – no growth concerns here.
One would be remiss not to mention Bitcoin’s whisper quiet 45% up move in less than two weeks. Up 8 days in a row, the longest win streak of the year and nary a peep from the media – seems pretty bullish to me.
Enjoy this BTV clip from Monday night where I discuss China, Tech, the Fed and more.
TGIF – enjoy the beach!