Tuesday, January 18, 2022

Morning Note: Ill-informed Solace on the Horizon

The meat of this morning's note comes from our internal market log:


The year has begun with quite the selloff in fixed income. The Bloomberg long treasury index fell 4.3% in the first two weeks, after being down 4.65% for all of 2021.

This comports with our view of inflation going forward, however, I do expect longer bonds to rally (yields to fall) early in the Fed hiking cycle, if not sooner as extreme inflation pressure begins to abate.

The market has grown accustomed to yields rising on the (hiking) rumor, falling on the news, per the past two hiking cycles… Ultimately rates would resume rising further into the hiking cycle as long as above-target inflation persists (our expectation) and the economy doesn’t fall into recession.

We may consider a tactical position in intermediate/long-term treasuries at some point in the first half, assuming the above looks to play out…

Implication for equities: Tech has taken a notable hit so far this year on rising bond yields; as we anticipated… The sector still remains rich right here, but, particularly if it can take enough of a further hit, we could see a notable relief rally if/when the curve temporarily bull flattens, per the above scenario.

Given that the dollar has not blown through resistance (50% retracement) amid higher yields speaks to the underlying structural character of conditions we’ve been pointing to… Should bonds rally on the first hike, or on abating inflation, the dollar could see significant downside… That would likely support our value bias, despite, again, what may turn out to be a stretch of positive relative performance for tech/growth…

On inflation: The solace that “the market” and much of the punditry will likely take in coming somewhat tamer inflation prints will, in all likelihood, be ill-informed; as it’ll be primarily the result of favorable base effects. I don’t see anything at this juncture suggesting that the underlying structural inflation pressures won’t remain intact.

Asian equities retreated overnight, with 10 of the 16 markets we track closing lower.

Europe's getting hammered this morning, with all 19 of the bourses we follow in the red as I type.

US major averages are taking a beating to start the day as well: Dow down 561 points (1.55%), SP500 down 1.56%, SP500 Equal Weight down 1.31%, Nasdaq 100 down 1.92%, Nasdaq Comp down 1.81%, Russell 2000 down 1.55%.

The VIX sits at 22.43, up 16.88%.

Oil futures are up 1.33%, gold's up 0.06%, silver's up 2.17%, copper futures are down 0.06% and the ag complex is down 0.10%.

The 10-year treasury is down (yield up) and the dollar is up 0.36%.

Led by silver, energy stocks, MP (rare earth miner), Viacom/CBS, base metals futures and gold -- but dragged by semiconductor stocks, solar stocks, ALB (lithium miner), financial and water stocks -- our core portfolio is off 0.56% to start the session.

"...bubbles are characterized by faster-than-exponential growth patterns, which result from amplified growth due to positive feedback among traders."
--Sornette, Didier. Why Stock Markets Crash


Have a great day!

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