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.
