7th of July 2021
We all know that finance is not an exact science. Contrary to what some people would have us believe and especially their clients believe, we must recognize that over the years, we have largely realized that nothing is taken for granted and that what seemed obvious 20 years ago is not at all obvious today. Still, yesterday’s session is the perfect example that if finance is not an exact science, almost everything is based on the psychology of the investor and the psychology of investing. What was good news yesterday is no longer good news this morning, just as what was bad news last week is not necessarily bad news today.
And suddenly, doubt
While two days ago we were quite confident on the economic recovery theme – which is quite easy, since that is what has been pulling us forward for the last 16 months – suddenly, when we saw some figures that were good but not as good as we could have hoped, we went to the dark side of the force and the indexes went to the negative side, just to see what it could do. We are still far from the stock market crash that some people have been hammering in the media over the last few days, but it is mainly this feeling of doubt that has taken hold of our minds since yesterday morning that hurts the most.
In Germany, the ZEW numbers were still showing a solid recovery on the horizon and that should have, could have been enough to have another day of bullishness, but we suddenly realized that orders to German industry were surprisingly weak in May. That’s when the knee ligaments gave out and the indexes went into depressive mode to finish down nearly a percent across the board.
In the US too, but less so
The problem with doubt is that when it’s there, when it gets into our minds, it’s very difficult to get it out and move on. And yesterday, in the US, doubt showed up in the form of the ISM numbers. I’m not going to get in your head about what the ISM is and what it’s for, since generally when general activity is more dynamic, we don’t give a damn. But since yesterday was maybe a little too quiet, we started thinking about the ISM. And when you think about Wall Street, it never ends well. So the ISM came out at 60.1 versus 63.5 expected, but mostly lower than the previous month’s number.
This is a sign of several things according to the experts.
First of all, if you analyze this number and all the traffic behind it intensely, you realize that one of the problems that is starting to weigh is not the fact that there are no jobs, but the fact that “people” don’t want those jobs. Currently, the shortage in the hotel and restaurant sector is becoming more and more apparent and this is not helping the growth in the sector. It seems that everyone who used to be a waiter, a cook or a front desk clerk in a hotel has taken advantage of the pandemic to become something else. We don’t really know what happened to them, but it’s pretty crazy to have an industry that’s looking for people on the one hand, and on the other hand, about 10 million people who don’t have a job, but who don’t want to fill the holes. Now, it’s true that it’s summer and that we’ve gotten used to staying at home for over a year, but we’re going to have to bring in some money at some point. Because I’m not sure that trading at Wallstreetbets is a sustainable position in the long run.
Another sign that the ISM is weak according to the experts is that it could mean that we have reached a peak in the post-pandemic growth cycle. And that’s scary because it has a bit of a domino effect and causes our certainties to evaporate.
Patatra
The ISM’s disappointment put pressure on bond yields. The 10-year bond immediately fell back to the bottom of its upward channel, to 1.35%. And that’s when everything suddenly becomes clearer and our perception of things changes. Remember, a few months ago, when yields were rising, we panicked because it meant the inevitable arrival of an inflationary cycle that would force us to go to the bakery with a wheelbarrow of banknotes because the cost of living was going to increase.
Except that this time, the fact that yields are decreasing is worrying stakeholders who are starting to think that growth is slowing down and that we will end up stalling, despite all the stimulus and other support. Suddenly, it’s not inflation that’s freaking us out, but the slowdown of a growth that we had imagined to be permanent. Yes, I know, you have to keep up, but that’s how it is in finance. What excited us two weeks ago can turn into an incurable disease in a few hours. Just by changing our views, just by interpreting things differently.
And bang goes the oil
And that’s not all! Yesterday oil took a beating. After hitting a 6 year high, we learned that OPEC couldn’t agree because the Emirates were rolling around in the sand and refusing to reach an agreement. This was ONE of the reasons for the rise until 23 hours and 12 minutes ago. So that positive reason turned into a negative reason and the barrel went from $76.35 to $72.88 this morning. Market psychology also intervened on the subject and suddenly reminded us to say: “beware, if oil is falling, it means that growth is slowing down, everything overlaps with the ISM, so we must sell everything”…
But NOOOOOOOOO !!!! Oil has not gone down because we’ve surreptitiously decided to stop filling up our cars and grounder Easyjet! Oil went down because OPEC can’t reach an agreement and the traders took the profits!!! It’s been going up for six weeks without interruption, from time to time it’s also good to get some cash in the account. But yesterday we didn’t care. Yesterday we decided to give a huge kick to our certainties of the day before yesterday, to refocus on the convictions of tomorrow. We decided that from now on, everything we liked would no longer please us and that we would no longer see the glass as half full, but as half empty. Or maybe it was the other way around.
If we take a step back, we could believe that yesterday’s session was a pivotal day in our minds. A sort of big blowout that took away the fears of inflation and replaced them with worries of a possible decline. We are not sure how long this will last, probably until another number comes along that will tell us otherwise.
In the end, it’s still the Nasdaq that goes up.
This morning I have been talking a lot to try to give you a clearer picture of our great ability to change our religion in less time than it takes to change our religion. But the main thing to remember is that the market hasn’t done much in the US. If you read this morning’s press, everyone is terrified because the Dow Jones fell by 200 points, but we always forget to say that 200 points on 34’500 is not the end of the world. And then the Nasdaq still ended up at the highest level ever because everyone clung to the fact that with bond yields falling, we were all going to rush into tech.
That and then also the fact that Amazon finished at the all-time high because the Pentagon cancelled the Jedi contract it had awarded to Microsoft and re-tendered the two companies. Amazon gained nearly 5% the day Bezos was no longer Chairman and became a rocket pilot and the company took 100 billion in market cap in less than a week. When it comes to rockets, the graph looks like a launch pad at Cape Canaveral. There was also Nvidia, which set record after record, declaring again yesterday that it is doing very well in video games and crypto mining. The stock is at $827 and has exploded by almost 40% since the announcement of the split that will be effective soon. The day ends with the thought that economic growth may have spiked, but tech will never stop rising. If one were a psychiatrist and not a financial analyst or trader, one could almost say that the market, not just the market, the entire community of the wonderful world of finance, is becoming Bipolar.
And today? What are we doing?
This morning in Asia, the markets are plunging as a bout of risk aversion has pushed traders into bonds and the dollar. And we are especially anxious to read the FED’s minutes, which are expected to highlight a hawkish shift in US monetary policy. As if we hadn’t understood it last time, but that’s how we are in high finance; sometimes we have to be told often. Japan is down by more than 1%, Hong Kong by 0.75% and China is up by 0.4%, but I haven’t understood the behavior of the local markets for a long time.
Note that gold is at 1797$ and doesn’t know anymore if it is a hedge against inflation, a safe haven or just something to make jewelry and Vrenelis. Bitcoin is at 35’000, as it is every day and Ethereum seems to be taking more space now, but at the same time I don’t know anything about it.
In today’s news, the Pfizer vaccine suddenly seems to be less effective in Israel. One may wonder why in Israel, but I stopped wondering a long time ago. By the way, it should be noted that the Delta variant is a hit in Spain and infections are exploding. Probably nothing to do with the fact that everyone has thrown themselves on the beaches for the vacations. We are already looking forward to see the results for the South of France and the measures that Olivier Véran will put in place for this fall, in order to confine France until May and to reopen to vote for the outgoing King. Basically, there is a lot of talk about COVID this morning. Maybe even too much.
On the financial side, we are talking about the end of OPEC because they don’t get along anymore. We are talking about DIDI which lost 20% after its app was removed from the Apple Store on “orders” from the government. Xpeng, which fell on its first day of trading on the Hong Kong stock exchange. But since it’s electric cars, it makes me laugh. Goldman Sachs is bullish on American Express and we start talking about the launch of the iPhone 13 as Apple approaches its all-time high.
Numbers of the day
Today there will be industrial production in Germany and JOLTS in the US. But the thing that will get us swinging is the June FOMC Meeting Minutes that will be released and should tell us what we already know, the fine print at the bottom of the contract to boot. For now, futures are down 0.15%, we feel the mood is turning – for now.
As for me, I wish you a great day, the weekend will be busy in terms of publications on Investir.ch – and as the weather is like November, you have no excuse not to read. So don’t forget to read, share our articles, subscribe to our newsletter, join us on the LinkedIn page of the site and… come back tomorrow.
Have a great day everyone!
Thomas Veillet
CIO Merion Swiss Partners