Will the Fed's band-aid hold on for long?

Abraham George Macro View

Last few days have been rattled with more than usual volatility especially in the oil markets. Looks like Jay Powell and Janet Yellen were in unison to arrest the trend in asset prices. Temporarily it may have worked, but it won’t be for long. The lower prices in oil prices and the reversal in bond prices may have given the Fed some breathing space. Think it will be short-lived.

As the global talks on climate action heats up in the coming days, the planned destruction of the fossil fuels industry only builds a moat around the existing producers. They should get much more business as the global economy opens up and will be able to sell their production at higher and even more higher prices with supply being constrained.

To compound to all this, we now have a massive container blocking the Suez Canal. The Suez Canal disruption adds a new element to what’s already building up on the inflation front.

As billionaire fund manager Ray Dalio said in a recent interview, we have two types of inflation : 1) supply/ demand driven , and 2) monetary inflation. And we are getting both. Monetary inflation has increased close to 30 % in money supply from the same period a year ago.

On the supply/demand side, not only are we getting a supply crunch from the global economic disruption of the past year, the scarcity of supply is being met up with pent- up demand, as global vaccinations begin to bring people back to function with some resemblance of a normal life.

Add to all this supply issues, we have one of the most important seaborne trade arteries blocked. The Suez Canal handles almost 10% of global oil products and 12% of global trade.

As global politicians join hands to discuss the coordinated climate game plan, it could be that the clean energy stocks may take a hit. We could be in “buy the rumor, sell the fact”. Tesla was the poster boy for the clean energy initiative. It went up around eight times into the US election and even extended higher following the election. It acted as a proxy for all climate change activists. The total amount invested in climate change transition of $500 bio in 2020 was much smaller than the market cap of $800 bio reached by Tesla in January. Participants are starting to realize that this is a very crowded trade.

Equities

A large non-confirmation exists between the Dow which rallied to a new high on Mar 18 and the Nasdaq which made a high on Feb 16 nearly a month back. The bond yield/stock yield ratio has flipped to a preference for bond income over stock income since Mar 19, suggesting that on a relative basis bonds should do better than stocks until the relationship changes. The percentage of NYSE stocks making new highs just plunged by 50% for the first time in 5 months. The speed of the contraction indicates a change of character of the market.

The move down in S&P 500 so far from 3978 to 3875 is in five waves. So there is every possibility that the move up now can end up somewhere close to 3945 or slightly higher before the market makes its way down to the lower 3700 handle.

Bonds

As we outlined in the previous reports, bond prices pushed higher breaking the succession of lower highs and lower lows. Think prices should at least move up to 158^25 before we can see signs of a top again.

Euro

The Euro declined below the low of Mar 9 indicating further weakness from its highs of 1.2243 from Feb 25th. The initial target for this decline could be anywhere from 1.1600 to 1.1695 .

Gold

There is no change in gold outlook from the previous report.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.