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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Our Market and Economic Observations Heading into 2022

    Thanks to a subscriber for this report from Bridgewater which may be of interest. Here is a section:

    Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

    Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

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    'We have got a problem here': Low morale and redistricting hand Democrats a growing retirement issue

    This article from CNN may be of interest to subscribers. Here is a section:

    So far, 23 members of the House Democratic Caucus have announced they will not seek reelection. While it is common for the party in control to see a series of high-profile retirements ahead of a difficult midterm cycle, the sentiment inside the caucus is that even more departures are likely. A combination of political winds tilting toward Republicans, redistricting boxing some members out of easier races and an overall low morale among House members could lead to even more retirements in the coming months.

    "We have got a problem here," retiring Rep. Cheri Bustos said of the general morale inside the House. "There are way too many people serving as members of Congress right now who I not only don't look up to, I have zero respect for. And I'm saddened to have to say that."

    Bustos, who was first elected in 2012 and represents western Illinois, announced she was retiring earlier in the year and told CNN that she was looking for "a new chapter in her life." But it's clear that the current standing of Congress loomed over the decision. Bustos said that while she believes some Democrats aren't "team players" -- she did not name names -- the bulk of her concerns are with Republicans, and the prospect of turning over power to the GOP in 2022 is disturbing for all Democrats in Congress.

    "When you've only got a three- or four-vote majority and you see people who are in tough districts announcing that they're not running for reelection, yeah, everybody worries about what's ahead," said Bustos, the former chair of House Democrats' campaign arm.

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    Turkey Stock Rout Triggers Circuit Breakers Twice in an Hour

    This article for Bloomberg may be of interest. Here is a section:

    Turkey halted trades on all listed stocks after sharp declines triggered a market-wide circuit breaker,
    with the lira extending declines to a record low.

    Trading of equities, equity derivatives and debt repo transactions were automatically halted twice within an hour after the Borsa Istanbul 100 index fell as much as 7%. The index was earlier up more than 5.6% before sinking as a central bank intervention on the currency market failed to stem the lira’s decline. The currency has come under pressure after the central bank cut its benchmark repo rate by a percentage point to 14% on Thursday, despite inflation accelerating to over 21%.

    The central bank’s easing cycle since September saw the key rate fall by 5 percentage points, prompting a rush to buy dollars among corporates and retail investors.  President Recep Tayyip Erdogan has advocated for cuts in borrowing costs, arguing that lower rates will eventually free Turkey’s economy from a reliance on short-term foreign inflows. The policy pivot and the ensuing market turmoil prompted complaints from industrialists, who say the current volatility is hurting companies. 

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    Big Tech Getting Crushed in Jittery Day for Stocks

    This article for Bloomberg may be of interest to subscribers. Here is a section:

    “Anytime there’s a risk of easy money being taken away, that will result in some of these very expensive areas of the market to pull back,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.

    “The pressure on the Fed to pick up the pace of tightening is only mounting. With higher prices permeating the marketplace, we could see a snowball effect when it comes to inflation challenges as more suppliers justify higher prices and more consumers begin to close their wallets,” said Mike Loewengart, managing director of investment strategy at E*Trade Financial.

    “The inflation trajectory remains worrisome. While we believe that price pressures will abate next year, the Fed is doing the prudent thing by tapering faster, so that it is well-positioned to hike rates if needed,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

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    Tapering on Deck-Stick with Defensive Quality in Factor Frenzy

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

    Tapering is tightening for markets, if not the economy. Due to the much greater than expected rise in inflation, the Fed is pivoting to a more aggressive removal of monetary accommodation. We believe this is warranted and supported by an administration that appears less focused on the stock market as a barometer of its success. Furthermore, tapering is different than in 2014 for 3 reasons: 1) the Fed is exiting QE twice as fast this time,2) asset prices are much richer today and 3) growth is decelerating rather than accelerating. This could be important for the economy, too, given how levered consumers are to stock prices today.

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    Gundlach Sees 'Rough Waters' for Market as Fed Pursues Taper

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Gundlach, 62, said the reason why Fed Chair Jerome Powell characterizes the economy as strong, but not strong enough to allow for a rate hike at this point, is that the underlying condition is in fact weak -- artificially propped up by an unprecedented degree of stimulus.

    Here are some other takeaways from Gundlach’s remarks:
    He focused heavily on inflation, saying the annual pace of gains in the consumer price index could hit 7% in the next month or two. He ran through numerous inflation measures and pointed out that shelter costs have climbed significantly. He also said it’s possible that the CPI inflation gauge won’t drop below 4% throughout 2022.

    Markets could face more volatility now that the Fed has said it might quicken its tapering program.

    Gundlach reiterated that he bought European stocks for the first time in 12 years, which he disclosed a few months ago. He still owns some of those and they’ve done just OK until recently. He didn’t own emerging-markets equities, though he envisioned a scenario when they might outperform U.S. firms. “We’re looking for major opportunities” and emerging markets could be one over the next few years, he said.

    The dollar has been in structural decline since 1985, he said, reiterating that the twin-deficit problem (that’s the current-account gap and the federal budget deficit) will cause the greenback to fall over time, which bodes well for emerging markets.

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    Morgan Stanley Sees Fed as Greater Threat to Stocks Than Omicron

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    While “not that concerned about omicron as a major risk factor for equities,” the strategists led by Michael Wilson see headwinds building elsewhere, after Federal Reserve Chairman Jerome Powell signaled the possible accelerated tapering of asset purchases. “Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the strategists wrote in a note to clients.

    Brian Nick of Nuveen, the investment arm of TIAA, with $1.3 trillion in assets under management, also said Monday that “the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labor market.” In contrast, most of the economic and market risks associated with the virus “are behind,” according to Nuveen’s outlook for 2022.

    Other strategists, including those at JPMorgan Chase & Co., have also singled out a hawkish turn by central banks, and not Covid-19, as the main risk to their outlook for stocks. But while JPMorgan reiterated on Monday that its base-case scenario is for the equities rally to continue into next year, Morgan Stanley sees the S&P 500 trending lower, and valuations declining.

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    Email of the day - on deflationary risks

    In today’s Audio you stated that there was an increasing risk of deflation. This is unsurprising because the capitalist system rewards the production of cheaper and better goods, while the continuing industrialization of the under-developed countries maintains downward pressure on wages. Throw in the emergence of crypto currencies and one must ask if gold will ever regain its former status in the economic system. Your views would be appreciated.

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    Euro-Area Inflation Tops All Forecasts With Record 4.9%

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Anticipating a spike in inflation this month, ECB officials have redoubled efforts in recent days to reassure citizens that they are facing a once-in-a-generation cost-of-living squeeze that won’t endure, driven by energy and a series of one-time factors.

    While President Christine Lagarde is sticking to that script, some colleagues are warning that price pressures might take longer to subside, stoking speculation about the future course of monetary policy. 

    At a Dec. 16 gathering, the Governing Council is set to announce the end of its pandemic bond-buying plan and outline how regular purchases and interest rates will develop as the economy continues its recovery.

    “While energy costs and statistical effects can explain the bulk of this month’s jump, today’s reading also revealed some stronger than anticipated underlying pressure. That will add to concern over upside risks to the outlook, but the ECB is still likely to see inflation falling below 2% by the end of next year.” - Maeva Cousin, senior euro-area economist. 

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