Markets flirt with ‘new supercycle’ talk

“Everyone knows” that valuations no longer matter, and that central bank liquidity/fiscal stimulus will now drive a new bull market. But if “everyone knows this”, is there anyone else left to buy?


Oil

Brent duly hit its Fibonacci 61.8% target retracement of $61/bbl, before closing at $62.71/bb as technical traders tested the potential for a move to the 76.4% retracement target at $71/bbl.

Markets flirt with new supercycle talk –Oil

✦  HIGHLIGHTS

  • OPEC+ now faces a major dilemma – if they hold current output cuts, then US shale and others will gain major market share
  • Shale output is already recovering strongly with WTI now at $60/bbl
  • The US well count has also nearly doubled to 306 versus its August low of 172
  • Higher prices would further increase non-OPEC production
  • Saudi is particularly caught, as even a year ago it was needing to operate at full volume with prices of $83/bbl to balance its budget
  • The Biden administration is unlikely to repeat Trump’s mistake last spring of playing political games with oil prices

WATCH FOR

A crunch as the world of technical trading hits the reality of oil supply and demand.


S&P 500

“All news remained good news” last week with the S&P up 1% and the VIX volatility index stable at 20. Fed Chair Powell’s downbeat view of the economy was taken as meaning low rates might well continue forever.

Markets flirt with new supercycle talk – S&P500

✦  HIGHLIGHTS

  • The recent rally is now well into its high-risk phase, being well above the “tramlines” that have ruled the market since 2009
  • “Risk-on” remains the main theme with a record $58bn weekly inflow to equity funds, led by tech funds – although the market hardly moved
  • Powell’s statement made it unlikely the Fed would “even think about withdrawing policy support” for the foreseeable future
  • What traders are forgetting is that bubbles need more and more air to keep them from bursting
  • Biden’s $1.9tn stimulus is not new money, but a replacement for wages and taxes that cannot otherwise be paid
  • These basic facts will become obvious in hindsight, but are currently forgotten in today’s euphoria

WATCH FOR

Bullish cheerleaders looking for a new argument to support their case, as current themes are past their “sell-by date”


Interest rates

The rate moved up to 1.20%, whilst the MOVE volatility index was unchanged at 47.

Markets flirt with new supercycle talk – Interest rates

✦  HIGHLIGHTS

  • Rates are reaching a critical inflection point as they seek to move up beyond the lows seen in 2013, 2016 and last year
  • The “risk-on” mode means junk-rated debt issuers continue to enjoy remarkably attractive pricing
  • Centene Corp paid just 2.5% for 10-yr bonds
  • Yet Spain also saw €65bn demand for its new 50yr bond, with a coupon of 1.45%
  • This suggests that investors remain desperate for yield, despite the risk to capital created by chasing sub-prime yields lower

WATCH FOR

Growing conflict between the bond market’s belief in inflation, and equity valuations assuming low rates will continue.


Inflation

Current supply chain bottlenecks are having their usual short-term impact on inflation, as buyers over-order to try and ensure they receive at least some product.

Markets flirt with new supercycle talk – Inflation

✦  HIGHLIGHTS

  • China’s export orientation since the summer has pushed its PPI into positive territory for the first time since last January
  • But its domestic consumption remains weak, with the CPI falling back into negative territory at -0.3%
  • US CPI remained stable in December at 1.4%, whilst UK CPI held at 0.6%
  • Japan’s CPI fell to -1.2%, but EU CPI rose to 0.9% in January
  • In normal circumstances, the dramatic rise in oil prices coupled with major supply bottlenecks would have sent prices racing higher
  • The fact this has not yet happened, suggests sellers are finding it difficult to pass on price increases due to weak underlying demand

WATCH FOR

Pressure on price rises to ease once oil price rises start to unwind.


Summary

Talk of new supercycles is likely to remain just that. Rather than gambling their new stimulus checks in the stock market, most Americans plan to save the cash for a rainy day.

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%


Leave a Comment

The pH Report subscriber benefitsOur flagship service, The pH Report, gives you a global perspective on business-critical issues.

To request a sample copy and find out more about subscribing
Request sample

Disclaimer

This Research Note has been prepared by New Normal Consulting GmbH for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. New Normal Consulting GmbH do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, New Normal Consulting GmbH does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by New Normal Consulting GmbH.
© New Normal Consulting GmbH 2021