August Angst
In theory, August should be a quiet month for political, economic and market developments but in practice it often turns out to be otherwise. While politicians (notoriously), corporate executives, fund managers and even journalists are on holiday…. stuff happens! Two weeks ago I wrote that the reflation trade was back on (for some) and interest rate hikes were postponed (again)…..not quite ‘God’s in his heaven, all’s right with the world ‘…. but getting close. Nevertheless, with (unusual?) prescience, I also wrote that ‘taper tantrums are coming to a market near you’ and last week stuff did indeed start happening because traders just could not wait until this week’s much heralded ‘Fed fest’ at Jackson Hole. Such impatience is not, however, really so surprising since markets are always looking forward. Last week they seemed not to like much of what they foresaw but at least some have cheered up again this week....so far.
The retreat from Afghanistan is above all a tragedy in human terms and we are still at the finger-pointing stage of a complex and dark tale, which has brought into question the competence and steel of the Biden Administration. It does not help that the pandemic is continuing to ravage many parts of the US amid bitter partisan divides. Moreover, far from dying away, COVID is wreaking havoc in those Asian-Pacific countries that had seemed to have contained it the most successfully. After consistently underestimating the virus, investors are once again having to contemplate its potential to cause economic damage. In fact, far from moving on from rapid recovery and resuming its long-term growth trajectory, the global economy is facing further disruption. Furthermore, the data from China in recent months is providing unwelcome evidence that things were not going that well before COVID struck. The recent numbers from the US, Europe and UK continue to be mixed at best (strong on jobs and Industrial Production but softer on Consumer Confidence and Retail sales). Above all, there is a widespread conviction that the Fed is entirely populated with bunglers who have already wrecked and/or are on course to wreck the US economy. This is clearly not the stuff bull markets are made on and some cynics are even arguing that traders are trying to dictate events through intimidating the Fed into postponing indefinitely not just rate hikes but also tapering its asset purchase programme.
The gloom can be overdone, however, and many companies are reporting record earnings while governments plan multi-year fiscal expansion. Newly hired and rehired workers will clearly be going out to shop, dine, exercise, holiday and boogie. On that basis, the US still looks to fare better than most, not just for those chasing upside but also seeking safety. In particular, the FAAMGs are now widely regarded as a safe haven that can protect (and some) against any problems in the rest of the S & P 500 and the lesser fry in the mid-cap 400, small-cap 600 or Russell 2000. The traditional safe haven of 10-year Treasuries still has its fans, despite negative yields net of inflation. Buying over the last two weeks suggest that the inevitable rise in yields may be more limited than has been expected hitherto, even if the US Government steps up its borrowing and the Fed does eventually taper. Appetite for US assets is helping the dollar vs. other currencies including those rival safe havens yen and Swiss franc.
We should get more smoke signals from Jackson Hole in the next few days. However unfavourable the initial market reaction, how long will it be before the smoke is decoded as 'buy the dip' and the show moves on to the next FOMC meeting (dot plot and all!) on 22nd September?