Retail investors typically have little experience of major downturns. When they decide to go “all in” on equities, as with the dot-com mania in late 1999, it is normally a sign of trouble ahead.
Oil
Brent tried to move higher this week, boosted by the outages in the USA, but ended weaker at $62.84/bbl
✦ HIGHLIGHTS
- As suggested last week, today’s oil price is high enough to raise global output
- Saudi Arabia announced it would reverse its unilateral 1mbd cut from April, as Riyadh suddenly realised it was losing market share
- Other OPEC+ members now expect current cuts to be rapidly relaxed, even though demand is still lacklustre
- Typically, weather-related hits to US oil output are quickly reversed as conditions improve
- The coming week will also start to reveal the freeze’s impact on US oil demand
WATCH FOR
WATCH FOROil market volatity to continue as OPEC+’s hopes for increased output clash with weak demand.
S&P 500
The S&P was down 0.7% on the week at 3907, as the markets began to worry about the impact of higher interest rates. The VIX volatility index rose 10% to 22.
✦ HIGHLIGHTS
- Current equity valuations have been “justified” by the all-time lows in interest rates – but these are now rising very fast
- They may well be the ‘trigger event’ for a market correction
- Worryingly, retail “investors” have moved on from silver and cryptocurrencies to leveraged VIX derivatives (e.g. UVXY) as their next ‘enthusiasm’.
- Renewables are another “enthusiasm” with P/E multiples for ‘green stocks’ up 24 points during 2020 vs 2 points for sector peers
- Total CEO Patrick Pouyanné also points to “crazy valuations” being paid for acquisitions in renewables
WATCH FOR
Equity cheerleaders increasingly forced to rely on hopes that a strong V-shaped recovery is inevitable by Q2
Interest rates
The rate moved up sharply to 1.34%, whilst the MOVE volatility index jumped to 60.
✦ HIGHLIGHTS
- Fear is rising in fixed-income markets.
- The rise in government bond yields will soon pressure junk bond yields
- Centene’s new 10-yr bond is paying just 2.5% versus the “risk-free” 1.34% yield available on Treasuries
- Investment grade yields at 2.2% confirm the mis-pricing in junk
- A major rise in junk yields to reflect inflation fears will pressure equity markets, given these are currently priced for perfection
WATCH FOR
Equity and junk bond markets to start to react to rising bond yields
China
China’s new ‘dual circulation’ policy places a high priority on moving up the value chain with its exports.
✦ HIGHLIGHTS
- China’s export-led recovery last year meant that it overtook the US to become Europe’s most important trading partner
- A key part of the ‘dual circulation’ policy involves the use of next-generation technology to support its position as the ‘manufacturing capital of the world’
- The Industry & IT Ministry’s new plan for 2021-23 focuses on digitalising traditional industries; building the Internet of Things; 5G and robotics
- The idea is for production to become cheaper, cleaner and more efficient, with major support from government
WATCH FOR
China aiming to boost its manufacturing capability to offset the downside created by its dependence on fragile global supply chians.
Summary
We don’t believe in the idea of a V-shaped recovery which will permanently increase inflation and bond yields. But equity markets are starting to realise that you can’t have one without the other.
Oil
S&P 500
Interest rates
Market view today
Some concerns
Some concerns
Expecting inflation
Our current view
Negative
Reversion to mean inevitable
Expect long-term deflation
Positioning began
December 2020
December 2020
December 2020
Confidence level
Initial
Today
.
.
.
Relevant positioning
Cautiously bearish
Cautiously bearish
Neutral 10-year and longer-dated Treasuries
Confidence level: 
= 100%, = 75%, = 50%, 
= 25%
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