Thursday, 9 March 2017

As the Day of Reckoning Nears

My choice article that sums up succinctly what has happened recently is this. (It’s because I really like the two GIFs at the beginning how it clearly shows how every corner of the market has moved.) While a few days of data don’t usually make a longer term trend, what I do (and only) know is that we can’t afford to be complacent.

In the Asia high yield bond space, after a few days of a slow grind downwards, the market today opened very weak, with one shop describing it as “panic bid hitting on screen”. (Hitting the bid means selling.) Commodity names and bonds with long maturities were hit the most, which means it must be because of (1) oil prices (domestic inventories data) (2) rates (ADP job reports).

I must admit I was surprised by the rates movement. Isn’t it priced in already? Fed Chairwoman Janet Yellen’s statement last Friday “As I noted on previous occasions, waiting too long to remove accommodation would be unwise” is particularly notable, because besides being as explicit as she can be, it represents a sudden U-turn from the previous dithering the Fed has displayed for the last few years about raising rates. This U-turn is summed up by a global strategist: “We all know that the only data the Fed is really focused on is the daily S&P print.” Lol.

On commodities, rather than oil, perhaps we should take a look at copper, a well-known bellwether for the strength of economic growth given its pervasiveness in everyday hustle and bustle.

Source: Soc Gen

The chart clearly shows that while the correlation between copper prices and stock prices has been inverse since 2011, stock prices rose further even as copper broke out of the downtrend. Pre-2011 aside, what it suggests is that investors have flipped from seeing the deflationary backdrop of falling commodity prices and bond yields as good for equities, to rising bond yields and commodity prices also being good for equities. Which brings me back to the theory that people are just looking for whatever reasons to buy. Surely that is not sustainable? Of course this is just what I think, which doesn’t matter. It’s all about the market (a collective opinion of the masses) and the expression of its opinion, and obviously it’s bullish.  

In any case, what is the implication for us?

Short term downside risk is increasing due to more hawkish Fed rhetoric at a time when investor positioning is stretched. A correction will then provide a more comfortable buffer for us to enter our bets on the improving economic and corporate fundamentals and potential pro-growth policy reforms.

Again, my opinion.

For now, I will just read my newly acquired book “A Guide to the Good Life” by William Irvine.


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