Monday, January 03, 2022
Please
find below our latest Weekly Trend Report covering major asset
classes and currencies.
Have
a nice week ahead and good luck going into the new year.
Marc
Bentin
2021: An Exceptional Year …
Last year was exceptional and wild in many respects,
driven by the pandemic and Western deficit spending explosions, exceptional monetary
easing, historic (but relatively narrow with GAFA’s leading the way) stock
markets performance, soaring commodities and the somewhat associated inflation
running hotter and possibly not on a so “temporary basis”, all at the same
time.
·
While there were
more deaths from covid in 2021 than in 2020 and while the late December surge
in daily cases exploded to 2mn globally, markets did not seem to want to care
too much, delivering a powerful late Christmas rally, seemingly reassured by the
Omicron Tsunami not translating into a concomitant acceleration in the number
of daily casualties (giving people some hopes (at least) that 2022 will be the year
when covid finally fades away. This has the potential to be the good news.
Source: Bloomberg
Source: The Economist
·
Taking the US
as a reference, 2021 US federal fiscal deficit reached USD2.77trn, bringing the
cumulated 2-year shortfall to an historic USD5.9trn, matching the total amount
of debt of accumulated since 2006 and leaving Treasuries/GDP ratio at 105%
(from 41% in Q42007). The same happened in Europe.
·
Debt
monetisation and ZIRP combined were the main policy choices to fund deficits
(holding the rationale of a temporary spike in inflation for most of the year) and
drive equity markets through 70 consecutive new highs late last year. Investors
were left with no other choices than piling on equities driven by TINA (“there is
no alternative”) and the most powerful magnet of all, FOMO (“fear of missing
out”). Investors (among them a new breed of investors and speculators trading “meme”
stocks on Robinhood for a living and who do not want to go back to work, at
least not at the same salary) bought more stocks (USD1trn) last year than over
the past 19 years combined while large corporations, already winning from the
pandemic (apple, msft…) continued to buy back shares
only too happy to substitute debt to equity as a source of cheap capital. Others
delisted for the same reason with leverage buyouts. Now that inflation, set to
rise on a confluence of factors (asset inflation, supply chain disruptions,
geopolitical tensions, accelerated and sometimes awkward Green transition policies)
has become more entrenched, with lasting second round effects (salary inflation,
rents, second hand cars etc…), there is a need to lift the foot from the
accelerator and push on the brake (should Omicron permit). It is going to be a delicate
balancing act with wide ranging implications (for bonds, stocks, FX and
precious metals).
Source: Bloomberg, ZH
Source Bloomberg, ZH
·
Despite solid
rising inflation and heavy fiscal issuance, bond yields dropped, real yields cratered
(also and primarily in Europe) and yield curves flattened because of debt
monetisation. If monetisation stops, other policy relays will be necessary to
keep the status quo. I do not quite see which one, baring a sharp stock market
correction or a resumption of QE (ultimately my guess). This seems to be the scenario
shared by F. Zulauf, a member of the Barron’s
roundtable for 20 years, (who correctly anticipated the 1987 and 2007 “corrections”.
He does not expect too much of a conflicted situation…until 2024, however. Hence
his relatively benign medium-term outlook for stocks for this year.
Bloomberg, Zerohedge
·
2022 was also
the year, despite a rocky last couple of months, when a broader range of investors
started to consider that cryptos were worth investing 2% or 3% of their assets
into, “just in case fiat money goes to hell”, to paraphrase T. Peterfly, the billionaire founder of Interactive Brokers. I
could not bite into the narrative that cryptos could constitute a valid long
term inflation hedge (the last 6 months of the year where inflation really took
off did not coincide with the best part of the year for the bulk of bitcoin’s 60%
YTD gain) but cryptos took gold lunch last year. They could remain well worth
investing the money we can afford to lose. The fact that cryptos can be negatively
correlated with everything one day and positively correlated with anything the
next also make cryptos a useful diversifier in portfolio construction (which is
a reason why many hedge funds also own some). The key risks for cryptos (besides
the interest of the underlying technology) are that unlike fiat currencies,
they are not backed by anything, not even the sovereign taxation power. They
are also intrinsically worthless (unlike gold and silver), highly volatile,
hence unfit as a means of payment for most, exposed to the risk of being
regulated away (as they are mostly in China, India, Russia and “officially” critically
viewed elsewhere). As outlined by Robert McCauley, in a recent FT article, bitcoin could also be viewed (beyond its huge ecologic footprint) as worse than a Madoff-style Ponzi Scheme and a mere “pump and dump” scheme. History will judge
but cryptos have certainly been a powerful “pump” scheme and a great way for
intermediaries (crypto exchanges) to make lots of money on the back of retail
investors who pay heavy transaction costs (much more than an stocks, bonds, FX)
and face heavy roll down costs for those owning cryptos via futures backed ETF’s.
Some of the
key risks ahead?
Making forecasts is a difficult exercise but one that can hardly be
avoided at this time of the year. We can at least identify the major risks.
-
High and
rising inflation rates (we will cover the subject in some more details tomorrow
…and expectations. This is a key risk because a little bit of inflation always benefits
everybody but too much of it for too long invariably becomes toxic economically,
fiscally, financially, socially and ultimately politically)
-
the ways that
will be deployed (or not) to contain inflation (Fed tapering and tightening)
will define the favourable or unfavourable outcome.
-
geopolitical tensions.
The risks of things going “mad” in either Taiwan or Ukraine are almost
impossible to hedge and will remain as hard left tail risks to the global
outlook. Cool heads will most likely prevail.
But debates and conflicting economic and geopolitical interests will remain heated
with elevated military tensions and the risks of accidents not inexistent.
-
Social tensions
derived from the “all round” asset inflation coupled to rising food and energy inflation
if not contained could increase the social divide with risks of mounting populism.
Some are arguing that we are witnessing the first innings of Orwelian crackdown on civil liberties by governments everywhere.
But I am not going there… and I hope the end of the pandemic situation will bring
back our lives more or less where they were before
(NB: most YTD scores were reset over the week end)
Over the past week, the S&P500 gained 0,9% (26.9%
YTD) while the Nasdaq100 gained 0,2% (0,0% YTD). The US small cap index gained
0,2% (0,0% YTD). Biotech dropped -2.3% (-3.8%YTD).
Cboe Volatility Index dropped -4,1% (0,0% YTD) to
17,22.
The Eurostoxx50 gained 0,7% (0,0%), underperforming
the S&P500 by-0,2%.
Diversified EM equities (VWO) gained 0,6% (0,0%),
underperforming the S&P500 by-0,4%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies
dropped -0,4% (0,0%, Z-score -2,2) while the MSCI EM currency index
(measuring the performance of EM currencies vs. the USD) gained 0,0% (0,0%).
10Y US Treasuries dropped 2bps (60bps) to 1,51%.
10Y Bunds climbed 7bps (39bps) to -0,18%. 10Y Italian BTPs underperformed
rising 6bps (63bps) to 1,17%, outperforming Bunds by 0bps.
US High Yield (HY) Average Spread over Treasuries
climbed 0bps (-77bps) to 2,83%. US Investment Grade Average OAS dropped -3bps
(-2bps) to 1,00%.
In European credit markets, EUR 5Y Senior Financial
Spread dropped -1bps (0bps) to 0,55%.
Gold
gained 1,0% (0,0%, Z-score 2,2) while Silver gained 1,3% (0,0%). Major Gold Mines
(GDX) rallied 2,3% (0,0%).
Goldman Sachs Commodity Index dropped -0,9% (0,0%).
WTI Crude gained 1,9% (55,0%).
Overnight in Asia,,,
Ø S&P500 +13points; Nikkei -0.4%; CSI300 +0.4%
Ø Oil edged higher as Libyan supply
tightened ahead of an OPEC+ meeting on Tuesday to discuss production policy for
February.
Ø U.S. equity futures gained, while Asian stocks were
mixed. China Evergrande Group shares were suspended in Hong Kong.
10 Days In Charts…
Global
Risk Appetite & Confidence
Check out different gauges of Risk Appetite .
Check China … (Stock
Indices, CNY…and Evergrande)
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