Some observations on the key equity and macro narratives shaping today’s trading session, as summarized by JPMorgan’s Andrew Tyler.
As the drivers of the global bull market are well known and now consensus, it is worthwhile to investigate the potential risks to the market. 2 risks are rising yields and the level of the USD.
With bond yields expected to rise, the velocity of the move is more important than the absolute levels. An increased velocity in the move may be the market signaling that there are more problems underlying the US economy than headline numbers suggest; one problem is stagflation.
Keep an eye on Wednesday’s CPI number, specifically the core CPI number. An in-line or lower number may be the better outcome for equities.
Further, let’s see how the market digests the $126bn of treasuries coming to market this week.
Meanwhile, looking at cross-assets, JPM’s John Normand writes in his latest JPM View note that as the influence of meme stock trading fades, many benchmarks for the global reflation theme are making new all-time highs in price (S&P500, Nasdaq, Russell 2K, Dax), new 2021 highs in yield (US 10Y, inflation breakevens) or new 2021 lows in spreads (DM/EM Credit).
He adds that as the outlook on the global economy and its ability to lift even rich markets is unchanged, it is not the focus of this week’s JPM View. Instead, it probes potential correlation breakdowns (beyond the Equity/Bond relationship) that would make markets more challenging. Within Equities, it’s Value rotation that delivers for styles but not for regions. In Currencies, it’s a USD that rises versus the majors but falls versus EM. In Commodities, it’s Oil higher but Base Metals and Bulk Commodities lower. All seem strange, but they aren’t total strangers.
Finally, JPM’s Mislav Matejka writes that while the reflation trade is still on track, he focuses on the role a stronger USD could create as a potential headwind across global equities. His thoughts summarized below:
- We continue to believe that most drivers are supportive of reflation trade, and the advancing risk assets. This includes steepening yield curves, likely acceleration inPMIs from Q2, no early withdrawal of excess liquidity, the triggering of VIX buy signal and much improved technical backdrop, among other. Of the potential headwinds, the USD stands out. It has started the year on a firmer note, and the risk is that USD strengthens further,which could impact a number of reflation trades.
- The overall equity market typically performs better when USD is weaker, with the correlation between global equities and USD pretty consistently inverse. If the USD were to show a notable strengthening this year, that would, to some extent, go against JPM’s bullish equity market call.
- EM equities traditionally show a strong positive link to EM FX, and inverse to USD. That said, JPM doesn’t see USD up vs EM FX this year, and even though CNY appears to have closed the gap with relative performance of Chinese equities – see chart – CNY could strengthen further. JPM remains OW China in a global context, which together with better EM ex China, should allow EM to beat DM this year.
Mon, 02/08/2021 – 10:15