Price discovery disappeared when central banks began flooding the major markets with cheap money, and now retail investors have joined the party.
Oil
“Technical traders” have taken over the Brent market as we noted in early January. At $59.34/bbl, they are now very close to their target of the Fibonacci 61.8% retracement at $61/bbl.
✦ HIGHLIGHTS
- Prices are now well out of line with supply/demand fundamentals
- OPEC has again reduced its forecast for demand recovery from 5.9 mbd to 5.6mbd
- The US drilling rig count has risen for the 18th time in 19 weeks
- OPEC member Iran (outside the quota) will add 1.5mbd by the end of Q1, and return to pre-sanctions level output
- OPEC output at 26mbd is now 10mb below its end-2016 level of 36mbd and 7mbd below the end-2019 level
- Saudi is taking the main pain of the reduction, and is acutely aware that it risks repeating its ill-fated 70% cut in the 1980s
WATCH FOR
WATCH FORTraders love volatility, and are now simply waiting for the right moment to push prices lower again
S&P 500
The S&P reversed course, jumping 5% to a record 3886. The VIX fear index fell by more than a third as markets returned to the “all news is good news” theme.
✦ HIGHLIGHTS
- Friday’s weak jobs report was seen as positive because it supports the need for stimulus
- Market drivers remain simplistic – “risk on” or “risk off” – rather than related to fudamental valuation
- The top 1000 shares in the Russell 2000 have an average P/E of 97
- The “risk on” mode continues to over-estimate the likely speed of economic recovery due to vaccines
- It also ignores the fact that Biden’s $1.9tn package is a replacement for income that has been lost – not new money
WATCH FOR
Bullish cheerleading to continue to alternate with a relapse to “risk off” mode
Interest rates
The rate moved up to 1.17%, whilst the MOVE volatility index was unchanged at 47.
✦ HIGHLIGHTS
- Inflation bulls were cheered by news on the stimulus package, catching up (as we expected) on the likelihood it will pass
- Markets are assuming two contradictory outcomes – that stimulus will boost demand, and the Fed will allow interest rates to rise
- Inflation bulls also continue to ignore demand-side fragility and structural weakness
- The majority of US population growth to 2030 will be in the lower-spending Perennials 55+ cohort
- Lower oil prices will turn inflation to deflation
WATCH FOR
Growing conflict between rising interest rates and the bullish equity market: both can’t be right.
CHINA
China saw the first example of an online retail frenzy in 2015, with novice investors flooding into the market and leading the Shanghai market to double before the bubble burst.
✦ HIGHLIGHTS
- Stock markets only opened in mainland China in the 1990’s, and Beijing still uses the “national team” to buy/sell
- Chinese markets are often volatile as only 7% of the urban population own stock, making them thinly traded
- Despite formal restrictions, mainland Chinese money is now flowing into HK – and Beijing is turning a blind eye
- Chinese investors can leverage their money via margin lending when investing in HK
- Friday saw the world’s largest IPO since 2019, when video-app company Kuaishou’s stock closed 160% higher in Hong Kong
WATCH FOR
More high-priced IPOs in Hong Kong as China’s retail investors continue to flood in.
Summary
Retail investors are busy topping up the “punch bowl” originally filled by central bankers. But history suggests we are now much nearer the end of the party than its beginning.
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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