The end of the pandemic in the developed countries has seen former favourites start to be reassessed. Formerly high-flying Tesla is down from $900 in February to $675 today, as questions start to be asked about its product quality and actual earnings potential. Friday’s weak US jobs report punctured the myth of a rapid return to “normal”.
As forecast last month, technical traders succeeded in retesting the $70/bbl level for Brent, before prices fell back to close at $68.27/bbl. Significantly, however, Iran is now moved to centre stage in terms of energy geopolitics.
- China concluded its 25 year “cooperation agreement” with Iran a month ago.This agreement provides for significant Chinese investment in Iran’s oil industry in return for a discounted offtake
- The Biden Administration seems close to agreeing to revive the Iran Nuclear deal, perhaps as soon as next month. This would reduce US sanctions and likely lead to a major increase in Iran’s oil exports
- A further sign of the changing landscape is that even Saudi Arabia has opened diplomatic talks with Iran, which may become the start of a process to normalising relations
- OPEC’s output cuts to balance the market have now been runnng for over a year, and are becoming increasibly painful for all those involved. Any increase in Iran’s exports would be very difficult for it to absorb.
A growing realisation that sluggish demand could easily be overwhelmed by increased supply.
The S&P rose another 40 points to close at a new record at 4232, with the VIX volatility index down 2 points to 17. Regulators, however, are finally starting to become worried about market concentration with Citadel now executing 47% of all US retail volume – more than the NY Stock Exchange.
- For the moment, the market still believes that “All news is good news” – so Friday’s weak jobs report was taken to mean Federal Reserve support might increase
- Yet as Harvard economist Jeremy Stein warned: “Equity markets at a minimum are priced to perfection on the assumption rates will be low for a long time”
- The Fed also struck a more negative note on Thursday, warning that “asset prices may be vulnerable to significant declines should investor risk appetite fall, progress on containing the virus disappoint, or the recovery stall”.
- The Biden administration’s attitude to market oversight is becoming more visible, with SEC Chair Gensler warning (in the context of equity trading) that “Market concentration can also lead to fragility, deter healthy competition, and limit innovation”.
Further disappointing news as robustness of global recovery brought further into question
The yield on the 10-year rate closed lower at 1.58%, after crashing to 1.47% in a panic reaction to the jobs report, whilst the MOVE volatility index slipped to 54.
- The market confirmed our comment last week that “Bond markets remain in a back-and-forth state“
- Inflation bulls were forced onto the back foot, in spite of firm commodity pricing
- Disappointing employment data followed below-expectations ISM data on both manufacturing and services
- Market confidence remains reliant on Fed’s indication of ‘low for even longer’
- Gold, however, continues to show signs of rallying, having risen from its early-March low of $1675 to close at $1831
Contrast between inflation numbers and business activity reports to perpetuate back-and-forth bond markets
China’s rising debt load is a source of increasing concern inside and outside the country. Chinese media are now starting to focus on the risks from local government’s hidden debt, which is thought to total between Rmb 20tn – Rmb40tn ($3tn – $6tn).
- As Caixin reports: “Recent statements by leaders of the State Council and the Ministry of Finance, and government documents make it clear that the 14th Five Year Plan period (2021-5) will be a critical time to defuse the risks stemming from hidden local government debt“
- Last month, the State Council suggested it would start to “punish those responsible for illegal borrowing activities”
- If pursued, the new policy would call into question China’s debt-driven growth model over the past 20 years
- As the chart shows, its total debt has risen from near zero in 2002 (when records begin) to almost $40tn today
- Yet even if one takes China’s GDP numbers at face value, each $1 of debt has produced less than $0.45c of GDP growth over the period
Increasing concern over the implications for the Chinese/global economy of any attempt to reverse China’s addiction to debt
Investors are starting to look more closely at the reality behind the hype that has dominated financial markets, since the Fed started its stimulus programme on a “temporary basis” in 2009.
Market view today
All news is good news
Expecting modest inflation
Our current view
Reversion to mean inevitable
Expect long-term deflation
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%