Impassioned by President Biden’s “Buy American” initiative and in anticipation of Janet Yellen’s confirmation as Treasury Secretary, stock market investors were revelling to new heights relentlessly pumping cash into US shares which helped propel both the S&P 500 and Nasdaq to record highs.
But the upbeat close certainly belied a day of equity market turmoil under the hood.
Still, buckle in it as it might be a bumpy Asia session as local retail froth greets President Biden’s “Buy American” mantra and the untimely escalation of US-China political tensions via the Taiwan route.
There’s nothing in the investment world that’s quite like hitting a patch of black COVID-19 economic ice when traditional investing wisdom suggests the best offence is a good defence by taking your foot off the gas pedal as the most straightforward function of damage control.
But nothing could be further from the truth in what will likely inspire a rewrite of “The New Market Wizards” and go down as the most opportunistic technology inspired stock market buying bonanza as here we are again with the NASDAQ and S&P finishing at record highs meriting derisive laughter from Wall Street denizens by the apparent absurdity of it all.
But who can blame Wall Street for hitting the amber light as recent history tells us best to be fearful, not cheerful when retail gets rapacious?
The last time we saw epic retail froth in single names like GME and EXPR today was when Hertz and CHK were ripping, and day trader David Portnoy hit peak fame in June 2020, we know how that ended in tears.
Big tech stocks still gaining favour
However, is there some logic in the hefty move among tech stocks? When I packed it in last night frustrated by currency market moves amid massive signs of lockdown de-risking everywhere, it honestly felt like capitulatory behaviour was sinking its teeth in which begged the question as to whether an enormous sell-off was imminent.
One argument for the outperformance could be that tech enjoys low rates, so the fixed-income performance helps amid lockdowns. After all, in a foreshadowing effect, Netflix rose 16% last week after subscriber numbers soared by a record 37mn in 2020.
Unsurprisingly, it seems lockdowns and TV go hand in hand and by extension, so does gaming and the use of cutting-edge software and hardware components.
And with the bulk of Tech market cap (75%) reporting during the next two weeks, it’s clear investors like the pack’s heavyweight leaders instead of buy-the-laggards, leading to these eye-catching moves. And I’m not sure that logic doesn’t make sense.
At some level, dramatic price action is understandable with investors – deprived of yield elsewhere – expecting rapid growth in future earnings, such as in high-growth high-promise sectors like new technology and clean energy which continue to resonate where the payout horizon is long. Hence the long-term view makes sense provided low rates oblige.
But at some point, the black ice will come back to haunt maybe not in tech. Still, it would be best to worry about the deflationary effects while playing it through commodities where the signalling impact on producers is more vigorous and might only end in tears.
The Energy sector continues its retreat and while it feels insignificant these days from a market cap perspective, some all-encompassing early warning signs around the new US administration’s policies are starting to show up on a sectoral basis.
Oil shows resilience
Crude price resilience is awe-inspiring in the context of extended and fresh lockdown measures across Europe and snags in the manufacture and rolls out of vaccine.
But it was OPEC to the rescue once again as in the wake of Saudi Arabia shouldering a hefty chunk of Q1 oil price damage control via voluntary production cuts. Confirmation from SOMO that Iraq would cut production designed to make up for 2020 quota breaches under the OPEC+ agreement helped assuage the continual Q1 stream of industry-wide consumption and demand down ballots.
This guarantee of the principle of compensation was music to the market’s ears as OPEC compliance demonstrates unwavering unity within the group.
Presenting a unified OPEC front to combat the negative demand effect of COVID lockdowns is a most welcome deliverable at this stage of the oil markets recovery. More price planks the better.
The fact that group members remain committed to adjusting production policy to fit macro circumstances provided a most timely bridge especially with oil traders struggling to digest the China lockdowns and the demand implication from Lunar New Year mobility restrictions during the year’s busiest travel time in Asia.
-Stephen Ines Chief Global Market Strategist at Axi
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