No news is good news in a buy everything world, and the hand wringing angst apparent after Monday’s equity market retreat disappeared as rapidly as it began, as normal service resumed on Wall Street last night. With the US rates market negotiating a chunky treasury auction without incident, leaving US yields almost unchanged, the FOMO-nista herd quickly moved into “buy the dip” mode. Equities, precious metals and energy rallied, and the US dollar fell across the board.
Somewhat surprisingly, the Emperor’s New Clothes bitcoin didn’t share the dollar debasement, global recovery, vaccines, and we’re all doomed, love. The digital Dutch tulips fell by over 4.0% yesterday and have lost another 2.50% to USD33,166 of fiat currency dollars this morning. Bitcoin has now shed nearly USD10,000 a digital tulip in the past few sessions, and I am still waiting for signs of the so-called “institutional tulip money” espoused by apparent experts, to appear. Being bitcoin, a 10% range intra-day is a mere flesh wound to the digital asset, in a world where tradeable versus investable is seriously blurred. The digital Dutch tulip could easily be USD42,000 again tomorrow or could drop through USD30,000 and turn from Dutch Tulip to Dutch Elm disease.
Thankfully, I am unlikely to be asked today whether we see the top in equity markets like yesterday, after a one-day fall. It probably does highlight the nervousness out there in markets though, with its stretched valuations on traditional methodologies. Three Federal Reserve officials spoke overnight, and from what I can tell, all were very dovish. All were optimistic for an acceleration of the US recovery in the second half of the year, and all appeared comfortable with rising inflation. Both Bostic and Kaplan suggested tapering could occur if employment and inflation accelerate, and Bostic suggested rate hikes were not likely until late 2022.
Fed expected to remain dovish in H1 2021
The net message seems to be that the Fed will be as dovish as they can be in the H1 2021 and are probably keen to dampen any over speculation that US yields will spike higher. Depending on the vehemence of the Biden New Deal, tapering may well be wishful thinking on the Fed’s part, especially if a torrent of US government debt is being issued into a market that is nervous about being long at the bottom, in yield terms. The global financial system is completely addicted to zero per cent central bank money.
I would argue it has been since the GFC, not the Covid-19 crisis, because rates never “normalised,”, the Fed and its central bank brethren have made a rod for their own monetary backs. The taper tantrum this time, when it comes, will be a taper earthquake, and not a tantrum. I do believe this will be a story for 2022 though, if not later, and not one driven by one gloomy day for Wall Street on Monday.
Nothing has materially changed for the “buy almost everything” trade. The US dollar retreat overnight smells more of tail-chasing then the end of the short dollar squeeze. US yields will decide that, and I suspect they will head higher again once Biden takes over formally and reveals his fiscal goodies agenda. In other asset markets though, the dipping-buying herd can still dream of CaliFOMOcation, even if prices trade sideways for a while, diminishing your risk-free instant gratification. The world’s central banks and vaccine manufacturers have got your back.
In Asia, China monetary supply data gave some concern yesterday. M1 growth comes in much lower than expected at 8.60%, while M2 rose 10.1%, still slightly below consensus. The PBOC is subtly signalling that the appreciation trend in the yuan has done enough for now. Nevertheless, if monetary conditions are tightening more than expected, it may struggle to offset yuan appreciation. December’s data may be just a blip, but January’s number will be much more closely monitored now. If M1 and M2 (basically all the money in circulation) fall again, this may require some reassessment of China’s 2021 growth. I’m not panicking yet though; blip is much easier to spell.
South Korea’s employment data disappointed today, as the Covid-19 restrictions finally made their presence felt. The needle has probably moved slightly towards a rate cut at this Friday’s Bank of Korea meeting. The BoK announcing previously that it would now feed labour market dynamics into their rate-setting thoughts. I believe that the BoK will keep their powder dry and remain at 0.50%, but a surprise cut could lead to some temporary won weakness.
Otherwise, the highlight of the session will be US inflation data this evening. Headline inflation is expected to rise slightly to 1.30%, with core inflation remaining at 1.60%. With the US bond market nervous at the moment and acceleration in inflation, we will probably see US yields rising again. Given the schizophrenic nature of financial markets this week, the US dollar will likely also spike higher, equities will drop, and gold will get crushed once again.
Thankfully we have another plethora of Fed officials speaking tonight after the releases to calm the nerves of the end-is-nigh inflationary merchants of doom. It probably won’t save me from a battery of questions again asking if the equity rally is over. The answer is no; it just isn’t likely to move in an instant gratification day-trader-nirvana straight-line like post-March 2020.