Blame the Hot Money
US markets continue their bullish trend. BFM 89.9 asks Tony Nash if this is due to better than expected corporate earnings in the coming quarters or the Fed monetary policy. Also discussed are the OPEC+ oil production and how oil will be affected by hurricane Ida, and what’s the status of supply chain specially around semiconductors?
This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/blame-the-hot-money on September 2, 2021.
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WSN: We speak to Tony Nash, CEO of Complete Intelligence. Now, US markets, I think it’s a bit of a choppy day, but still, nonetheless, the trend is bullish one. And what is that based on, though, is it expectations of stronger corporate earnings this quarter or just driven by ample liquidity flooding financial markets?
TN: I think more the latter than the former. We saw really good corporate earnings in the previous quarter, but in the current quarter, we’re hearing more rumblings of trouble with earnings. And that’s part of the base effect in the previous quarters, in 2020, companies had cut a lot of costs late in the year, so they’re reaping the benefits now. We’re starting to see the base effects come in where they had already cut a lot of those expenses in Q3 of 2020. So now we’ll see that going forward, we won’t see as much kind of profitability.
So what’s the baked into the market right now? It’s the Fed, it’s stimulus. It’s an expectation of a $3 trillion fiscal stimulus bill. So if we start to hear that this $3 trillion fiscal infrastructure bill won’t happen, we’ll see some disappointment if we see the jobs numbers on Friday come in disappointing, we’ll see some dampened momentum. And if we hear any more talk about tapering, which I don’t think we will for at least six months. But if we do, we’ll see some downward pressure in the market.
So all of those things are possible. But in the meantime, the Fed is injecting $120 billion into the market every month to keep everyone happy. And markets seem to be taking it well.
WSN: And I want to stay on corporate earnings, because I just wonder whether the recent inflationary pressures on the economy will be reflected in perhaps lower margins for corporate’s incoming quarters.
TN: Sure, companies are feeling pressure not just with raw materials and input factors, but also with salaries. Wage inflation in the US is pretty high right now. Companies are feeling it from all sides. So I think those margins are much thinner, both on those base effects I mentioned earlier. Also inflationary effects, both in terms of input goods and wages.
PS: And you say you paint a bit more cloudy picture for the US, but if you compare the US economy and financial markets versus Europe and China, they really have outperformed global peer strike. Could you explain it disparities there?
TN: When you look at China, I think it really has a lot to do with stimulus. China is really late to the game in terms of providing stimulus. They spent quite a long time in 2020 and 2021 deleveraging their economy. So getting rid of debt. Very procyclical. China was shrinking and they were delivering, which is maybe healthy for the balance sheet, but not necessarily the best thing to do to grow the economy.
In Europe, the ECB is really nervous with inflation. And so they may take more aggressive action against inflation instead of continuing to loosen to accelerate the economy. So the US is outperformed because nobody thinks the Fed is going to take aggressive action year, certainly. And probably not at least until Q two of 2022.
WSN: And how do you think the US dollar will react against the Euro and the yen in light of all these recent FED announcements on the timing of the tapering and also the rate hikes?
TN: We have the dollar continuing to weaken through, say, November. And we’re starting to see some expectations of dollar strength, not a lot of strength, but marginal dollar strength starting in, say, November. And that could be on, say, ECB deciding to continue to loosen. It could be on China. Adding stimulus. Currency is a relative game. As central banks get more active globally relative to the US, it could really help weaken their currencies on a relative basis.
PS: And let’s talk about oil because I want to get your views on yesterday’s OPEC+ meeting. They are sticking to next month’s oil production increases. What impact will that have on prices in view? There also Hurricane Ida has also hit US or production?
TN: Yeah. Well, he can. It has fit some under sea production, but it’s really hit more refining capacity than really production. So the bigger issue in the US is around gasoline prices and refining, than it is around kind of supply of oil with OPEC+, it’s kind of a status quo. Let’s move ahead as we had expected, which is a really good sign. Look, oil is trading between what, 67 and $75 generally, and that’s kind of their happy. So as long as it stays in that zone, OPEC will continue to move ahead and stay within the agreement. If it goes higher, then they may accelerate the production. If it goes lower, they may pull back a little bit.
WSN: And let’s stay on supply side disruptions. Right. We talked about that just a few minutes ago. But do you think that there are still concerns over this, especially for things like semiconductors and certain commodities?
TN: Oh, yeah. Absolutely. So the supply chain issues, we hear a lot about Chinese ports and backups to Chinese ports and these sorts of things. But the Port in Long Beach in the US is backed up, hugely backed up. So the supply chain shocks are not only in China. US ports have their own issues. So when I hear, say, American companies complain about supply chain issues in China, that’s not the only factor. It’s US ports catching up. It’s US ports that are delayed and so on and so forth.
So I don’t think we’re done with this. In fact, it may get a little bit worse because the holiday season is coming up in a few months. And if we think supply chains are backed up now, they may get even worse going into, say, October and November, especially to import into the US.
PS: I mean, some are even saying that this could even go on to, quarter 1, ’22 or even the likes of semi cons.
TN: Oh, absolutely. Semiconductor supply chains are incredibly complex. So for them to get out of these issues, there are multiple layers of issues that have to be reconciled, and it could easily be Q1 ’22 by the time we’re out of this.
WSN: All right. Thank you for your time. There was Tony Nash. CEO of Complete Intelligence, giving us his views on where world markets are hitting. And I think the interesting point is that, look, the bullish trend is here to stay as long as the Feds just keep rates where they are. Plus, of course, there are expectations with regards to the US stimulus plan on the infrastructure bill. Right. Which I think is now going through the House. And apparently there’s something like 700 amendments that the Republicans want this document through the Max.
PS: I know, but I think they are optimistic. I hope to prove this call in October, but Tony does point relatively bleak picture for the short term. September. October is also seasonally weak in the US and also the stimulus packages or end or swim September. Very interesting. What he’s saying about the Fed is not likely to say much about tapering for the next six months as well.
I mean, if you look at where markets are right. The S&P 500 is up 20%. The Nasdaq are almost close to 19%. The Dow Jones is 16%. If I was a fund manager, I would do nothing. In fact, I might be tempted to lock in my games. Right. Because the year is almost coming to a close. Do I want to take on more risk for the potential return of two? 3%, maybe not. So we might be heading into quieter months for at least one or two, maybe towards year end, and then we might see some book closing.
But till now, maybe everyone’s just taking a bit of a breather. Look at markets, at what kind of corporate earnings will be coming out, and let’s see where the politicians are up to.
PS: And I wonder whether there’s an opportunity to reallocate to other markets in Europe where you see some value and even Southeast Asia as well in the midterm long term as well, for sure.
WSN: I’m sure Financiers already considering the Strategic allocation for 2022 Actually and rotating into markets that perhaps did not do as well this year. Stay tuned. BFM 89.9.