ACTV - Weekly Commentary: Summer Of Discontent And Instability

2024-06-08 05:05:00 ET

Summary

• The ECB and Bank of Canada cut rates this week, with markets seeing the global central bank community's easing cycle now underway.
• Booming markets have a way of disregarding corrosive fundamental factors. Especially in today's backdrop, there are competing narratives: the golden era of markets and capitalism versus increasingly vulnerable historic global Bubbles.
• With a pretty good bond market squeeze in progress, sentiment shifted emphatically to the 'a weakening economy will soon unleash a Fed loosening cycle' narrative.

It was another important week - and I'm not referring to Nvidia's market cap surpassing Apple's to reach $3.0 TN (or Roaring Kitty's podcast touting GameStop attended by 600,000). There were market-surprising/shocking election results in Mexico, India, and South Africa. Volatility was notable across international markets. The ECB and Bank of Canada cut rates this week, with markets seeing the global central bank community's easing cycle now underway. And Friday, another stronger-than-expected Non-Farm Payrolls report rattled the bond market. Could there possibly be a common thread?

The Mexican peso sank 7.2% this week, with over half the loss on post-election Monday. Mexican stocks (S&P/BMV Index) were slammed 6.1% in Monday trading. Indian (Nifty50) equities were hit 5.9% in Tuesday's session.

June 6 - Bloomberg (Ezra Fieser): "Early Monday morning, one of the world's most profitable currency trades unraveled, done in by a twist in Mexican elections few saw coming. Twenty hours later, investors in India started frantically dumping stocks, triggering a one-day, $386 billion wipeout, when they realized they had badly miscalculated the scope of Narendra Modi's election victory. Around the world, surprise results in some of the biggest developing countries are illustrating how much markets have riding on the politics of 2024… From Mumbai to Mexico City, the Year of the Election - in which 40 countries are holding national votes - is already burning investors, providing an early warning as elections in the European Union and UK near, and five months ahead of the US presidential contest."

Highly speculative (and levered) markets don't mix so well with voter acrimony. Importantly, speculative Bubbles and public enmity are not coincidental. They are inevitable consequences of inflationism and monetary disorder. Given enough time, policies so revered by the markets will be viewed with increasing disdain by the masses. Wealth inequalities become only more pronounced late in the cycle, creating a sprawling divergence between market euphoria and deepening public dissatisfaction. Political class market embracement/accommodation at some point shifts to the appeasement of ever more powerful populist movements. Markets this week at least acknowledge the unfolding power-shift to disgruntled electorates.

Booming markets have a way of disregarding corrosive fundamental factors. Especially in today's backdrop, there are competing narratives: the golden era of markets and capitalism versus increasingly vulnerable historic global Bubbles. Overwhelming evidence supporting the latter ensures ample hedging and shorting - fuel for recurring squeezes and rallies. It all becomes too alluring, with short-term speculation coming to dominate. Irrespective of underlying fundamental trends, speculative markets will innately gravitate to opportunities associated with bullish narratives.

This was a fascinating week in the bond market. After trading at 4.63% the previous Thursday, 10-year Treasury yields were down to 4.29% Friday morning ahead of the May jobs report. Sure, there were some weaker data earlier in the week. The ISM Manufacturing report (48.7) disappointed, especially the four-point drop (to 45.4) in New Orders to a one-year low. Job openings (JOLTS) fell to 8.059 million (expected 8.350 million), while ADP came in at a weaker-than-expected 152,000 (175k estimate).

With a pretty good bond market squeeze in progress, sentiment shifted emphatically to the "a weakening economy will soon unleash a Fed loosening cycle" narrative. The market ended Thursday pricing two cuts by the Fed's December 18th meeting....

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