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Week-end run-down:

  • Stocks are ending the week in a bit of a mixed mood, but more half empty than half full. Value/cyclicals on the back foot with bond yields down, tech bid for the same reason. Losses in Europe running around 0.3-0.5% for the main bourses. Looks like the sluggishness in Europe is driving some profit-taking in the US outside of the tech space, energy under pressure from residual weakness in oil.


  • Austria’s lockdown and likely lockdowns in Germany put European stock markets into a downwards gear shift earlier in the session and we are holding losses into the close. Austria is also going to make vaccination mandatory, which has so far not inspired much concern about civil liberties from the people you normally hear from when government’s overreach. Across the pond the House has passed Biden’s BBB social spending plan.


  • US markets are mixed – Big Tech lifting Nasdaq up 0.5% to a record high and helping the S&P 500 fend off any meaningful decline. Dow is down 0.7%.


  • Bonds are telling the story at the moment – 5bps drop in the 2yr is the biggest drop since March 2020 – which seems to be down to the Austria lockdown read across. 10s declined to 1.52%. That move lower in rates only supports growth/tech etc so Nasdaq record high = good for US, but it’s headwind for Europe – which prefers higher rates and is more value sensitive.


  • More mixed messages from the Bank of England as chief economist Huw Pill said he doesn’t know which way he will vote in Dec…is there much more data to come before then? Seems odd, only reinforces the unreliable nature of the BoE comms and uncertainty around the future path of monetary policy. If you don’t have something useful to say don’t say anything. GBPUSD is chopping around the 1.3450 area after pulling back from the 1.35 area earlier in the session, 1340 offering near-term support.


  • Oil tried to rally today but WTI (Jan) is back to a $76 handle – likely mainly on the lockdown situation in Europe, but sentiment remains bearish amid broader concerns of oversupply.


  • Euro is weaker – Lagarde comments earlier + lockdowns cement belief in ECB being slowest to normalise and potential for anti-Goldilocks scenario for Europe into 2022. Anti-Goldilocks but not sure if big bear or little bear…are you playing weaker euro and weaker EZ stocks…or just one? Normalisation of real yields next year ought to be supportive for value/cyclicals, particularly autos and banks, but this is definitely not what we are seeing today. Weaker euro on CB divergence + economic divergence between the US and EU has been and remains the simplest play.

EURUSD is off the lows of the day but still under pressure at 1.13 and conspicuously made a fresh 16-month low.

EURUSD Chart 19.11.2021

Finally, notable that The Economist is leading with something about how no one predicted all this inflation, which is simply untrue. So I leave you with this from me, dated August 26th, 2020: 


I find this idea of AIT [average inflation targeting] being a better anchor for inflation expectations problematic. Whilst I don’t pretend to being an economist, regular readers will be familiar with my view that a sharp bounce back in growth (albeit to a level still below pre-pandemic potential) combined with unlimited Fed accommodation, a vast increase in the money supply (if not yet the velocity of money) and a massive fiscal put is basically inflationary. Remember, as Friedman put it “inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output”. The rate of expansion in the monetary base is consistent with past bouts of high inflation in the 1930s, 1940s and the 1970s. Whilst post-GFC QE led to money printing, it was gobbled up by a financial system hungry for capital and balance sheet repairing. The fiscal stimulus this time makes it a very different environment. 


Layer on top of that the disruption to supply chains and fundamental shift in deglobalisation trends, and you create conditions suitable for inflation to take hold. If the Fed also indicates it does not care if inflation overshoots for a time – indeed is actively encouraging it – there is a risk inflation expectations become unanchored as they did in the early 1970s, which led to a period of stagflation 


…My concern would be that once you let the inflation genie out of the bottle it can be hard to put back in without aggressively tightening and likely as not engineering a recession. Nonetheless, this seems to be the way the Fed is going.   


Paul Tudor Jones put it best back in May when he said that the question of whether the current bout of money printing will ultimately prove inflationary comes down to how reasonable is it to expect that in the recovery phase the Fed will be able to deliver an increase in interest rates of a magnitude sufficient to suck back the money it so easily printed during the downswing? Most agree it won’t be easy – in fact AIT would effectively kick the can down the road for many years. The Fed is not even thinking about thinking about sucking the money back in. This ought to stoke inflation, but it could be more than the Fed wants – the genie is coming out. 

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