Why Perspective Is Key With Recent Weakness In Stocks

Okay, very good morning to you. It is Wednesday, 24th of February. Hope you are doing well. Just as a heads up, we have our regular weekly masterclass happening on Amplify Live at 6 PM this evening, London time. I'm going to be joined by Bilal Hafeez from the Macro Hive team. He used to be the head of global research at the likes of Deutsche Bank for the best part of 13 years and at Nomura for, I think, 3 or 4 years. So a guy of incredible experience. And, you know, just given some of the conversations of late that we've had about yields and the impact on equities and, you know, Fed timing and taper tantrums, it's going to be a really great time to talk to him. So, um, can't wait for that conversation again for the community. And just check out AmplifyLive.com if you're interested in, in being part of it. Otherwise, look, let's get straight into the, the market and what's going on. It's very much a what I would classify digestion of what was said yesterday. And we did see some increased selling pressure as we went through the session. In the end, the NASDAQ, an outperformer, as has been the case given a lot of those tech-related names are most susceptible to a higher yield environment. Um, so the NASDAQ was lagging once again, down 0.2%. Actually, the S&P and Dow finished positive albeit just by a touch of around 0.05% to 0.13% if you're looking at the S&P. So as we were kind of alluding to yesterday on the live feeds, that, you know, the lower that these equity markets go, we were quite confident in our view that Powell was going to come out and just essentially recycle the normal Fed stance. Again, he said, quote, the economy is a long way from our employment and inflation goals. And it is likely to take some time for substantial further progress to be achieved. So essentially, um, pulling— the idea of pulling back their support for the economy was just pushed against. And so very much so, irrespective of this reflation view and the improved growth prospects that we're seeing, which has been then a key driver behind some of the recent cross-asset class moves, Powell resisted at this point to make any change, as we were expecting, as I said. So yeah, quite a strong reversal that was seen in index futures really into the close on Wall Street last night to finish basically flat. A couple of things to be aware of on that front. On the calendar today, we do have Powell speaking again. So for anyone new to markets, he now speaks to the House, delivering his testimony. This is always the routine— Senate first, then followed by the House. This one, though, is not expected to be market moving at all. He essentially just repeats what he said to the other chamber of Congress, to now the House. So it's not new information, so to speak. But do be aware that you've got Feds Brainard and Clarida speaking throughout the afternoon. This is normal tactical kind of planning from the Federal Reserve. They like to put in some senior speakers voters in and around big kind of keynote events, just in case that the market requires some kind of re-guidance if it misinterprets the kind of message that was intended to be sent. But I think the message was loud and clear from Powell yesterday, which is at this point there's not going to be any change in policy for the time being. On the speaker front, I'm just going to quickly mention you've also got Bank of England's Hal Daines, the chief economist, speaking at midday. Now he's speaking off-topic, topic, speaking about changing world of work. And then Bailey, the governor, is speaking alongside a few other MPC members in front of the Treasury Select Committee. That's kind of a routine update for Treasury officials. Not expecting anything really from these speeches today from the Bank of England. However, one thing I thought was quite incredible I was reading this morning is that option bets are now targeting around 100 basis points of tightening by 2024. If you think about it, it was only a few months ago we were talking about negative rates. Are the Bank of England going to be adopting negative rates in the near term? However, just given the dramatic kind of turnaround in the fortunes of the UK economy in terms of the general outlook, from going from probably one of the worst responses to initial onset of COVID-19 to now one of the real leaders in the successful nature of the rolling out of a vaccination program has really flipped the whole scenario on its head. And given the roadmap that's been outlined with the final step 4 to be completed by kind of midsummer on 21st of June, the market at the moment seeing that as a bullish kind of situation to be reflected in the rates market for what the second half of this year looks like. So yeah, not expecting much from those guys, but just something to be aware of going forward. Sticking with the pound, one thing we did have overnight was a very explosive move in the sterling currency. These moves actually happened— I had it written down at 1:03 AM London time, so 3 minutes past 1 AM. And at 1:22 AM. There was two phases where it just popped higher and then popped again at 22 minutes past 1. Now there was no fundamental headline that came out. Check the newswires, there's nothing you've missed, anything of that nature. So a couple of things I'd say when I— when you see a price movement like that, I mean, for one, I'm just having a look at this trend line going back to the 16th. We've had a couple of retests here back on the 22nd, 23rd. So really this week's price activity. And you can see we kind of just got above that, came back to the line, and then bang, it just shot higher. So perhaps a little bit technical, perhaps more due to the illiquidity overnight which exacerbates price movement. You know, sterling futures I'm looking at here is particularly thin during Asia-Pac trade. The Asia region really not that interested in trading sterling, uh, with just general much more domestic-focused narratives driving markets. Few people looking at a Telegraph headline, um, and it basically was saying that restrictions could be lifted sooner than June 21st if data shows a large improvement according to a government source. But that came out more like 11 PM last night on the Telegraph, an exclusive piece, but timings don't work out. But it does lend its hand to the general upside bias. You know, you've got a combination of Powell reiterating the kind of ultra-accommodative stance the Fed is here for the time being. That helps keep the dollar generally fairly depressed around this 90 level in the Dixie. And then all of these improving kind of fundamentals stacking up for, for sterling, creating more bullish views about what the economy is going to look like and how quickly we're going to recover. So directionally, it definitely fits the trend, of course, because sterling's been a real outperformer of late. You know, if we look back to even just to 8th of February when we broke out over some of the peak of consolidation of price we had at late Jan, I mean, we've gone from a 137 handle up to a mid-142 handle where we're trading at the moment. So it's not an unusual thing, I think, to see just further kind of breakouts like this. And I just think all in all, I wouldn't over-interpret it. It's just a continuation of a trend that has fundamental substance to it in that respect. Otherwise, quick look at a few other things overnight in Asia-Pac trade. Although we did recover on Wall Street, a little bit mixed in Asian trade. Hong Kong equities were down actually an underperformer in excess of 2%. The city planning to raise stamp duty on stock trading to 0.13% from 0.1%. Chinese general equities a little bit softer for the third day in a row. And a lot of people looking at obviously the incoming Biden administration, how they're going to deal with China. I would say China is definitely on the list for, for Biden, but it's probably perhaps a little bit lower down the agenda behind things like stimulus, the COVID vaccine program rollout, and things of that nature, which obviously have more acute, immediate impact on the economy. But one of the things we've been seeing here, and I was reading, was that these tensions between the US and China definitely haven't gone away irrespective of the change of leadership at the helm of the the US. And reports suggesting US senators are eyeing legislation to curb Beijing's unfair practices and tackle Chinese censorship of US companies, individuals. So at the moment, they're going through a process of the Treasury Deputy Nominee Adyemo— I'm sure I've said that wrong, but I will work on that— also indicated that the US are open to using a Trump-era investment ban to punish China for its trade violations. So again, anyone who is looking for a slightly more perhaps passive approach, um, that's not materializing at this point in time. And if anything, I would say, as I have done since the beginning when Biden came in, actually I think a slightly more uniform approach from other Western developed leaders coordinating a strategy against China in particular on many different levels, but trade being one, I would say that's a worse situation for China and likely to aggravate them more than even what we had for more outspoken vocal Trump. So it's interesting to see how that obviously plays out. I'm not pinning that on the reason why Chinese equities were down overnight, but it's definitely something to, to be aware of. Overnight as well, you had the RBNZ rate decision. Really nothing too sexy going on there. They're unchanged as expected at 0.25%, and their bond buying program at 100 billion Kiwi dollars. They did say that— they stated the outlook ahead remains highly uncertain and prolonged monetary stimulus is necessary. So if you think about it, although markets are having a bit of a wobble of late about what high yields means for, in some respects, highly valued companies in certain sectors, i.e., tech and some of these kind of fad names that have been really driven and outperformed their underlying fundamentals, you could argue. The point being is that we've had Christine Lagarde, Jerome Powell, uh, the RBNZ— they're all coming out and basically saying the same things at the moment, is that as much as there is a degree of inflation expectations rising, that they're not looking to make any substantial changes of late. So Again, one of the things I was looking at with equities yesterday with Tim, we had a good conversation and we were looking at a few things, and it was this idea that, look, equities, fine, they can come off, but at lower levels I think you're going to attract a decent deal of buying. This is looking at the NASDAQ, and if we were looking— well, let's just— I think it really helps to put in the full pandemic picture because then you get a real sense of perspective. And this is pre-pandemic, this is March 23rd when we hit that low and the Fed came in with their unlimited QE pledge and an ultra-loose policy. And then look where we are at the moment, having traded at record highs here in the NASDAQ 100 future. So I do think perspective is key. We have sold off for consecutive days now, I think it's 6 in the case of the NASDAQ 100, It was so interesting. Um, I know even I was getting messages, people saying, what's going on with the stock market? And, you know, people have just been so caught up in this kind of race to all-time highs and beyond that a little bit of a pullback has got people panicking, which I, I do think at this point is unwarranted. Now, am I saying that this is the bottom? Not necessarily. I do think we could potentially come lower Um, and, you know, looking here in the S&P, you've got strong levels that the market reacted to, um, in the session yesterday, which was around those lows we had in mid and late Jan. I'd say an even bigger level would be down at 12,461, which starts to incorporate the kind of late summer high of last year, the retest and rejection that we had on the night of, uh, of the day of the Pfizer positive vaccine story, and then that's acted as a bit of a platform for price as well toward the back end of last year. Um, ultimately though, even if you look at the S&P, which I'll just bring up here on a daily— sorry, let me just reshape my chart. Sorry, I'm just going to clean up some of these. I was having a discussion yesterday with a few people. So let me remove— just going to remove these lines so it doesn't give you any confirmation bias for our discussion. But again, looking at the S&P here, this was the March kind of pandemic rout that we had when we went into the global lockdown on the spread of coronavirus pre-vaccines. Then we've, you know, we hit the all-time high not that long ago. We're talking about the 16th of Feb when we were trading up at around 39, 36.5, and now we've drifted back down to a fairly interesting level. We flirted and broke below there but came back up, which was this previous kind of area, 38.62, which encapsulates some of the previous double top on the all-time high that we broke out of. At the beginning of Feb. The point being here is that, you know, on any pullbacks— and if you look at the S&P here, I do think there is room for a degree of pullback. I mean, yesterday, yeah, you talk about the 3,800 level roughly, but I'm talking more about what if we saw something more meaningful in terms of a correction in equity markets. And, you know, if we go from all-time high down to, say, 3,600, that's a 9% move. If we go back to this level here of the pre-pandemic highs, that would be around a 14% move. Now these would all be technically correction-based moves in this equity market, but I think if you get down to these sorts of levels at any point in the future, um, whether here— but I think definitely if we start getting down to these levels, or even more so if we start getting down to this kind of area here at 3,200 I just think you're going to get tons of people coming in and locking in then what will be a recovery trade in equities that could create then the next kind of push on, and we move up through 4,000 as we go into the second half of the year. I mean, the important thing to understand here is, look, zoom out of this chart for a second and apply a little bit of perspective. Once again, if you actually look at this market and you look back all the way going, you know, to years gone by, a little— the market coming off back down to 3,600 really does not look particularly a frightening prospect when you start looking at the, uh, the incline of the S&P over these time frames. So even if we did get there, um, what could create that type of move? Well, one thing that the market is obviously very sensitive to at the moment is this idea of taper tantrums, which was that episode in 2013 when the Fed first started talking about speeding or slowing down the speed of their bond purchases. And that caused a bit of a panic given that we're still in the aftermath of the global financial crisis, and that would be the first tightening post that initial response to the GFC. Here I think we are gonna have a degree of tantrum at some point, because although Powell and other central bankers remain resistant— and I think for good reason right now— to push against any idea of tapering, at some point that will have to happen, and that will be a very difficult situation to manage that will undoubtedly cause a degree of volatility when it arrives. The question there is, well, how big is the tantrum? Um, but overall, once that and the market normalizes to the idea of normalization of policy, then I do think then that the upside remains true, given the fact then that there will be an underlying economic growth narrative that is driving things. Um, so, and that, as the guys were talking about, Eddie and Piers, in their video yesterday, you know, yields are still in relative historic terms low, the Fed will be incredibly cautious and slow to normalize policy, whether tapering or eventual rate hikes. None of that's going to happen anytime soon. And if it comes in the backdrop then of a still relative low-yield environment, albeit it's picked up, um, with economic growth, well, that's your kind of perfect cocktail for further upside for these indices. So I guess it's timeframe, of course, you know, You know, you're looking at intraday, sure, things have felt a little bit more heavy, but I think in a broader context, it's important to understand not to freak out and lose your head just yet. The show's not over just yet. All right. Going to have a quick look at the calendar and we'll wrap up. So we've talked about the speakers of the day. Actually, in terms of the calendar for today, it is pretty quiet. There's not a great deal going on, to be quite honest with you. Um, for this morning, uh, really the early afternoon data I'm looking out for is new home sales, and then you've got the DOE oil inventory numbers, and that's pretty much it on that front. We did have the APIs last night and we had a build of 1 million. Expectations were for a draw of around 5.372 million. So bearish, cushion bearish, um, by a large degree, as was gasoline. So we did have a bit of a downtick in, uh, WTI crude last night. That's that rectangle you can see here. Price is moving from around $62 down to close to $61 actually overnight. Mild recovery being seen here. I would not place a great deal of emphasis on inventory data for the time being. Um, now on a couple of different fronts, these numbers definitely bearish, but overall the market's trading, I would say, for reasons discussed in previous briefings a more tilted bullish set of narrative variables at the moment that are underpinning this rise in oil, chiefly born out of this kind of growth outlook story and narrative that's similar has been driving some of the yield move. So I don't think you could get too caught up in that. And obviously over the coming weeks or so, that inventory data is probably going to be a little bit skewed to reflect some of the ongoing disruption that we have from the Great Freeze. Over the US last week as well. But that's it, gonna leave it there, um, let you guys get on with the session. I will see you in the Discord room throughout the day. Just drop me any messages if you have anything, any questions for me, happy to help. If you're watching this on YouTube, don't forget to like and subscribe, really appreciate it. And if you want to join the chat with Bilal later on, just check out AmplifyLive.com. All right, thanks very much guys, take care.