Prepare to say goodbye to the great central bank-led rally

President Biden is the first President since Bush Snr not to worry about the stock market. His American Families Bill aims to “benefit workers rather than the owners of capital”, as the Financial Times notes.


Oil

Brent slipped $0.60/bbl to $66.12/bbl, but most traders have yet to grasp the risks created by the pandemic crisis in India – the world’s second-largest oil importer.

✦  HIGHLIGHTS

  • President Biden’s Earth Day Summit highlighted the critical importance of developing and deploying renewable technologies
  • These technologies will remove today’s regional energy and feedstock advantages
  • They will replace today’s fragile global supply chains with new local value chains based on renewable energy, recycled plastics and advanced manufacturing
  • The change will now be driven by economics, as the private sector will find ways of profiting from the new political direction
  • Companies will start to wake up very quickly to the challenges and opportunities created by this paradigm shift

WATCH FOR

Winners and losers to start emerging as the old paradigms disappear.


S&P 500

The S&P ended almost flat on the week at 4180, after a turbulent week, with the VIX volatility index up 1 point at 17.

✦  HIGHLIGHTS

  • Investors may be about to realise their hoped-for “blow-off rally” is in the past, rather than the future
  • Taxation was the big story of the week, with leaks suggesting Federal capital gains tax will rise to 43.4% (vs 23.8% today) for taxpayers with seven-figure incomes
  • State and City taxes would take this close to 60% in some cases
  • Investors were also concerned at possible taxes on capital gains within inheritances, whilst private equity worried about losing their carried interest benefit
  • Strong economic data on Friday (temporarily?) returned the market to a bullish mentality
  • If the leaks are confirmed, prudent investors may well decide to sell up quickly, rather than hope for Congressional pushback

WATCH FOR

Equity volatility to return this week as Biden announces his tax proposals


Interest rates

The yield on the 10-year rate was unchanged at 1.57% with the MOVE volatility index down slightly to 60.

✦  HIGHLIGHTS

  • Bonds had a back-and-forth week: positive economic news raised concerns over inflation, while tax concerns made Treasuries a “safe haven” trade
  • Bank of Canada said it will begin to reduce its QE stimulus programme, as it now expects to meet its inflation target before 2023
  • Other central banks will need to revisit their ‘lower rates for longer’ policies
  • The growing semi-conductor crisis confirms the problems with global supply chains
  • Investors are already voting with their wallets – US TIPS saw their 29th consecutive week of inflows for a YTD total of $14.4bn

WATCH FOR

Inflation concerns to return to prominence in bond markets


China

The Earth Day Summit confirmed that China and the USA understand the importance of working together on the climate issue

✦  HIGHLIGHTS

  • China confirmed its commitment to peak CO2 emissions before 2030 and carbon neutrality by 2060
  • President Xi added that coal consumption will peak by 2025, with coal-fired power projects reducing from 2026 – with 2030 the target for the move away from coal
  • China also confirmed that detailed sector and region-specific plans will be released before the start of COP26;
  • Its nuclear power strategy is already moving forward, with the State Council approving five new nuclear plants this month;
  • The plans to achieve net-zero emissions are expected to involve $15tn of new investments, according to He Jiankun, a top Chinese government advisor

WATCH FOR

China to publish more detailed aggressive plans over the summer, confirming its decision to play a leading role in combating climate change. 


Summary

Investors have largely forgotten how to value companies on the basis of their likely future earnings and management quality. They have a steep learning curve ahead, as the protection provided by the “Fed put” disappears.

Oil

S&P 500

Interest rates

Market view today

Some concerns

All news is good news

Expecting modest inflation

Our current view

Negative

Reversion to mean inevitable

Expect long-term deflation

Positioning began

March 2021

March 2021

December 2020

Confidence level
Initial
Today

.

.

.

Relevant positioning

Reality starting to dawn

Waiting for reality to dawn

Expecting higher rates for the 10-year and longer-dated Treasuries

Confidence level: = 100%,  = 75%, = 50%, = 25%


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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