When Markets Get Scared And Reverse

S&P 500 wasted another good opportunity to rise – one where the credit markets were largely aligned. Is it a sign of upcoming tremors that the 500-strong index couldn‘t defend the daily gains? Commodities weren‘t under pressure, the dollar wasn‘t surging (looking at the closing prices), precious metals did well, and even lumber enjoyed a white candle again.

Inflation expectations retreated, and so did Treasury yields – what‘s holding stocks then? Neither uncertainty about the Fed policy, nor surging inflation cutting into P&L, nor crashing bonds – what we‘re seeing is run-of-the-mill volatility as stocks move both into a structurally higher inflation environment, and await Fed moves which are much farther down the timeline than the markets appreciate. Heck, even the option traders keep undergoing the earlier announced shift to complacency.

Yes, the taper talk has dialed back the inflation trades to a degree but hasn‘t knocked them off in the least. In a reflation, both stocks and commodities do well, and we‘re still far away from worrying about weakening GDP growth rates (today‘s ADP and unemployment data are good proof thereof) – in my view, worries about inflation not retreating nearly enough during this Treasury market lull (taking up this summer) would come into the picture first.

Reopening trades aren‘t over, the housing market activity (housing starts, new home sales) has slowed down a little while XLRE keeps running, financials remain as strong as value (yes, there is more juice in that trade still), and no mad rush into tech (growth) is underway. Capacity utilization isn‘t at the top of the pre-corona range exactly, and oil prices (these serve as additional tax, a drag on the economy) aren‘t biting nearly enough. The job market isn‘t at the strongest either, and the hours worked don‘t match prior extremes either. Last but not least, global supply chains haven‘t entirely recovered to meet the reopenings-boosted demand.

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