Good morning.
It’s Columbus Day—a.k.a, Indigenous Peoples Day. The bond markets in the U.S. Are closed, but equities trading is wide open. And, no, it’s not a holiday in Italy, though we get the next best thing here in Rome: a mass-transit strike.
U.S. Futures and global stocks have traded lower throughout the morning. Goldman’s (slight) downgrade of the U.S. Economy is adding to investor gloom.
What’s all the chatter this week? Earnings (corporate-results season begins). Inflation (we get a big CPI read mid-week). And stagflation. Stag-what? Yes, that dinosaur of the 1970s and early-80s is back, front and center.
I explain why in today’s essay below.
Let’s see what else is moving the markets.
Markets update
Asia
- We begin the week with mixed markets in Asia. The Hang Seng, the best of the bunch, is up nearly 2% in afternoon trading.
- Chinese tech stocks are leading the way with Meituan surging more than 9% at one point. Chinese regulators slapped the food-delivery giant with a 3.4 billion yuan ($534 million) fine. Investors hope that’s the end of the company’s regulatory woes (for now).
- Crude closed out last week at a seven-year high as an energy crunch and soaring demand push oil and gas prices to new highs. Analysts are divided on whether we’ve reached the (short-term) peak.
Europe
- The European bourses were mixed in early trading with the Stoxx Europe 600 off 0.2% in the second trading hour of the session. Energy and banks led the way higher.
- Inflation concerns are gripping Europe, but divisions remain over how to deal with it, and how long it will last. A leading ECB council member believes prices will ease in the next 12 months, suggesting no need to touch interest rates. In the U.K., however, there are renewed calls to hike rates, as soon as December.
- Europe’s car industry hit a big milestone last month with the sale of new EV s eclipsing their diesel-powered road mates. That’s clearly having no impact on energy prices.
U.S.
- U.S. Futures have been trading lower throughout the morning. That’s after all three major exchanges floundered on Friday, but finished the week up a tick.
- The yield on a 10-year Treasury note sits at 1.613% this morning after jumping 14 basis points last week to reach its highest level since June. It’s not just the U.S.; sovereign yields are gaining everywhere.
- What’s on tap this week? We get CPI data (Wednesday), and the big banks report this week with Q3 results from JPMorgan Chase (Wednesday), Bank of America (Thursday) and Goldman Sachs on Friday.
Elsewhere
- Gold is down, trading around $1,750/ounce.
- The dollar is a touch higher.
- Crude continues to surge, with Brent above $84/barrel.
- Bitcoin had a quiet weekend, and the bulls aren’t complaining. BTC climbed above $56,500. Ethereum is down slightly, trading around $3,500.
***
On jobs, tech stocks and the S-word: stagflation
Markets economists didn’t have a good Friday morning. Their jobs forecasts missed the mark by a mile. That’s one take. The other take? If you’re looking at Friday’s jobs numbers, and only Friday’s numbers, you’re missing the forest for the trees.
As many have pointed out, pandemics make even smart forecasters look pretty silly at times. Yes, Friday’s mega jobs-miss drew plenty of headlines, and messed with the markets at the open, but the larger trend is more or less in line. And, more importantly, nobody is ripping up the tapering script.
As UBS’s chief economist Paul Donovan explains, “data keeps being revised stronger, and nothing is seasonally normal this year. The conclusion of the overall employment situation is that there is nothing to stop the Federal Reserve from scaling back its bond purchases.”
Besides, the Fed is “anxious to begin removing that stimulus,” reasons Chris Zaccarelli, CIO of Independent Advisor Alliance, “which is why it would have taken an extremely bad jobs report in order to derail that. This report was disappointing, without a doubt, but we don’t believe it is bad enough to stop them.”
The markets seemed to draw this same conclusion. Tech stocks, the most sensitive to tapering, fell throughout the trading session on Friday; Nasdaq futures are trading lower this morning, too.
That’s not the only headwind tech stocks face. Stagflation—high prices accompanied by anemic to negative growth—is the kryptonite of growth stocks.
Yes, the S-word is coming back in vogue. As Goldman Sachs’ equity strategist team writes in an investor report this morning, “’Stagflation’ was the most common word in client conversations this week as equity market volatility remained elevated.”
Goldman went back to 1960 and found 41 quarters—more than I figured, to be honest—of stagflation, which it defined as weak GDP growth and high inflation. “During those stagflationary periods, falling profit margins and rising interest rates reduced the median quarterly S&P 500 real total return from +2.5% to -2.1%. Real household wealth stagnated,” they wrote.
“Within the market,” Goldman continued, “health care and energy generally outperformed while Industrials and info tech lagged. Consumer spending patterns boosted the performance of consumer services firms relative to companies selling goods.”
(Incidentally, the health care sector has been a basketcase, one of the worst performing sectors on the S&P 500 in the past month, and underperforming the benchmark YTD. Energy though is killing it.)
You’re almost certain to hear a lot more of the S-word in the days to come. With earnings season upon us investors will be keen to hear how companies are handling higher input costs: will they eat the price rises, thus sinking their margins? Or, will they pass them on to consumers? Ultimately, will it sink corporate profits at a time when investors are particularly concerned about growth prospects?
Market swings are dominated by narratives. If the stagflation narrative takes hold, things could get bumpy.
***
Bernhard Warner
@BernhardWarner
[email protected]
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Today's read
Bitcoin—not gold—is the new inflation hedge, says JPMorgan—Coins2Day
Economic and Earnings Concerns Begin to Weigh on Stocks—The New York Times
Investors Watch for Rising Costs in Earnings This Week—Wall Street Journal
Market candy
$3 trillion
This data point really surprised me: "Collectively, unicorns are now worth nearly $3 trillion," writes Jessica Mathews in Coins2Day. The incredible valuation rise in pre-IPO companies is booming globally. Mathews (with help from Coins2Day's Nicolas Rapp) charts the biggest, and where they are on the road to the public markets.
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