Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

Technical Analysis

On the one year anniversary of the Covid-19 stock market low, we revisit the path taken on the S&amp;P 500.Remarkably, as global economic activity stopped, borders closed, and the virus spread, the stock market saw one of its most aggressive rallies, thanks largely to the Federal Reserve. A year later the S&amp;P 500 has made it 82% above that March 2020 panic low.Is this number important? Have we seen this before? If so, when? And what clues might it give as we approach the second quarter of 2021?

On the one year anniversary of the Covid-19 stock market low, we revisit the path taken on the S&amp;P 500.Remarkably, as global economic activity stopped, borders closed, and the virus spread, the stock market saw one of its most aggressive rallies, thanks largely to the Federal Reserve. A year later the S&amp;P 500 has made it 82% above that March 2020 panic low.Is this number important? Have we seen this before? If so, when? And what clues might it give as we approach the second quarter of 2021?

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

The steepening yield curve reinforces our view that the US$900 billion stimulus enacted at end-2020 will largely close the US output gap in the current quarter. The new Biden stimulus of US$1.9 trillion (pushing this year's fiscal deficit to a post-WWII record of 20% of GDP) will render further monetary stimulus superfluous. The Fed will be obliged to rein in QE in 2Q 2021, and actual raise the Fed Funds rate no later than its July 2021 meeting. We are bearish equities on a 6-month view, and bullish the US dollar. We reiterate our view articulated in December 2020 (<a href="https://www.smartkarma.com/insights/2021-to-mark-the-return-of-inflation-fed-hike-by-mid-year-implies-risk-off-by-2q-21" target="_blank" data-smartkarma-citation="insights:46348" rel="noopener">2021 to Mark the Return of Inflation: Fed Hike by Mid-Year Implies Risk-Off by 2Q/21  </a>elaborating on our June 2020 view <a href="https://www.smartkarma.com/insights/labour-market-slack-remains-but-fomc-will-need-to-tighten-by-mid-2021" target="_blank" data-smartkarma-citation="insights:40185" rel="noopener">Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021</a> ) that US core PCE inflation will begin to tick up toward 2% YoY by mid-2021, obliging the Fed to cut back on the size of QE, reducing its monthly purchases from the US$120 billion that it has promised. In January 2021, US base money grew by US$41 billion (much less than the promised figure), but this sufficed to boost M2 by 25.5% YoY: we observe that 24% YoY M2 growth (more than double the peak pace of M2 growth in 2009) has become an implicit target while core inflation is subdued and labour-market slack remains.The US output gap didn't close as much as expected in 4Q 2020 because of the spurt in Covid-19 infections, but the likely passage of Biden's US$1.9 trillion stimulus package (on top of the US$900 billion package enacted at the end of 2020) will cause the fiscal deficit to hit a record 20% of GDP in FY2021. The previous stimulus is likely to largely close the output gap in the current quarter (with real GDP likely to be only about 1% below its potential) based on the December 2020 stimulus. A further massive fiscal stimulus will make the Fed's QE superfluous.Inflationary expectations (as reflected in the 5-year TIPS/Treasury breakeven rate) are already for average inflation of 2.4% over the next 5 years. When a further fiscal stimulus pushes this year's fiscal deficit to a record 20% of GDP, core PCE inflation will quickly print above 2% YoY, obliging the Fed to cut back on its promised monthly QE during 2Q 2021, and to actually raise the Fed Funds rate by its July 2021 FOMC meeting.

The steepening yield curve reinforces our view that the US$900 billion stimulus enacted at end-2020 will largely close the US output gap in the current quarter. The new Biden stimulus of US$1.9 trillion (pushing this year's fiscal deficit to a post-WWII record of 20% of GDP) will render further monetary stimulus superfluous. The Fed will be obliged to rein in QE in 2Q 2021, and actual raise the Fed Funds rate no later than its July 2021 meeting. We are bearish equities on a 6-month view, and bullish the US dollar. We reiterate our view articulated in December 2020 (2021 to Mark the Return of Inflation: Fed Hike by Mid-Year Implies Risk-Off by 2Q/21  elaborating on our June 2020 view Labour Market Slack Remains but FOMC Will Need to Tighten by Mid-2021 ) that US core PCE inflation will begin to tick up toward 2% YoY by mid-2021, obliging the Fed to cut back on the size of QE, reducing its monthly purchases from the US$120 billion that it has promised. In January 2021, US base money grew by US$41 billion (much less than the promised figure), but this sufficed to boost M2 by 25.5% YoY: we observe that 24% YoY M2 growth (more than double the peak pace of M2 growth in 2009) has become an implicit target while core inflation is subdued and labour-market slack remains.The US output gap didn't close as much as expected in 4Q 2020 because of the spurt in Covid-19 infections, but the likely passage of Biden's US$1.9 trillion stimulus package (on top of the US$900 billion package enacted at the end of 2020) will cause the fiscal deficit to hit a record 20% of GDP in FY2021. The previous stimulus is likely to largely close the output gap in the current quarter (with real GDP likely to be only about 1% below its potential) based on the December 2020 stimulus. A further massive fiscal stimulus will make the Fed's QE superfluous.Inflationary expectations (as reflected in the 5-year TIPS/Treasury breakeven rate) are already for average inflation of 2.4% over the next 5 years. When a further fiscal stimulus pushes this year's fiscal deficit to a record 20% of GDP, core PCE inflation will quickly print above 2% YoY, obliging the Fed to cut back on its promised monthly QE during 2Q 2021, and to actually raise the Fed Funds rate by its July 2021 FOMC meeting. 

US: Steepening Yield Curve Is a Harbinger of Inflation That'll Oblige Fed to Tighten

December economic pause was followed by a US$900 billion stimulus that will largely be spent in 1Q 2021. The output gap (still 2.8% of potential GDP in 4Q 2020) will narrow sharply this quarter, making it impossible for the Fed to sustain US$120 billion of monthly QE. Whether Biden pushes through a US$1.9 trillion stimulus (without GOP votes) or a more modest US$1.5 trillion one with some GOP votes, it will prove inflationary by 3Q 2021. With the public debt soaring toward 120% of GDP, Biden's corporate tax hike from 21% to 28% will likely be announced (even if conditionally) at his 23 February 2021 speech to a joint session of Congress. We recommend being underweight equities, and long US$ on a 6-month view. The renewed surge in Coronavirus infections in the last two months, and related restrictions on economic activity, contributed both to the December decline in non-farm payrolls and a relatively weak print for real GDP growth in 4Q 2020 (+4%QoQsaar, -2.5% YoY). The output gap, which was 3.5% of potential GDP in 3Q 2020, only improved to 2.8% of potential GDP in 4Q 2020, delaying the onset of inflation risks, keeping both core inflation gauges at 1.5-1.6% YoY at end-2020. However, the US$900 billion fiscal stimulus was only enacted on 27 December 2020, and hence began to boost the economy only in 1Q 2021. If the full Biden stimulus of a further US$1.9 trillion is passed via a reconciliation process (without GOP support), the total of US$2.8 trillion will add 13.3% of GDP to the deficit for FY2021 (already estimated by the CBO at 9% of GDP before the two stimulus packages). That would be more than sufficient to close the output gap by mid-2021. Even a more modest stimulus (US$1.5 trillion) passed with some Republican support, would suffice to close the output gap by July 2021, pushing core CPI inflation above 2% YoY by 3Q 2021. M2 growth (which has plateaued around the 24% YoY handle over the past 8 months) will likely need to be reined-in by 2Q 2021, even if the FOMC is not immediately obliged to raise rates.Biden has already tightened environmental regulations, as promised, by rejoining the Paris Climate accord, imposing a moratorium on oil/gas drilling on federal land and water and revoking the Keystone XL pipeline permit. The two stimulus packages will boost EPS and economic growth. But with the public debt already above 100% of GDP, Biden will likely announce his promised hike in corporate taxes (to 28% from 21%) at his speech to the joint session of Congress on 23 February 2021. That too will slash EPS growth in FY2022 (Oct 2021 to Sep 2022). We recommend staying Underweight Equities, and de-risking portfolios. On a six-month view, we would be long US$.

December economic pause was followed by a US$900 billion stimulus that will largely be spent in 1Q 2021. The output gap (still 2.8% of potential GDP in 4Q 2020) will narrow sharply this quarter, making it impossible for the Fed to sustain US$120 billion of monthly QE. Whether Biden pushes through a US$1.9 trillion stimulus (without GOP votes) or a more modest US$1.5 trillion one with some GOP votes, it will prove inflationary by 3Q 2021. With the public debt soaring toward 120% of GDP, Biden's corporate tax hike from 21% to 28% will likely be announced (even if conditionally) at his 23 February 2021 speech to a joint session of Congress. We recommend being underweight equities, and long US$ on a 6-month view. The renewed surge in Coronavirus infections in the last two months, and related restrictions on economic activity, contributed both to the December decline in non-farm payrolls and a relatively weak print for real GDP growth in 4Q 2020 (+4%QoQsaar, -2.5% YoY). The output gap, which was 3.5% of potential GDP in 3Q 2020, only improved to 2.8% of potential GDP in 4Q 2020, delaying the onset of inflation risks, keeping both core inflation gauges at 1.5-1.6% YoY at end-2020. However, the US$900 billion fiscal stimulus was only enacted on 27 December 2020, and hence began to boost the economy only in 1Q 2021. If the full Biden stimulus of a further US$1.9 trillion is passed via a reconciliation process (without GOP support), the total of US$2.8 trillion will add 13.3% of GDP to the deficit for FY2021 (already estimated by the CBO at 9% of GDP before the two stimulus packages). That would be more than sufficient to close the output gap by mid-2021. Even a more modest stimulus (US$1.5 trillion) passed with some Republican support, would suffice to close the output gap by July 2021, pushing core CPI inflation above 2% YoY by 3Q 2021. M2 growth (which has plateaued around the 24% YoY handle over the past 8 months) will likely need to be reined-in by 2Q 2021, even if the FOMC is not immediately obliged to raise rates.Biden has already tightened environmental regulations, as promised, by rejoining the Paris Climate accord, imposing a moratorium on oil/gas drilling on federal land and water and revoking the Keystone XL pipeline permit. The two stimulus packages will boost EPS and economic growth. But with the public debt already above 100% of GDP, Biden will likely announce his promised hike in corporate taxes (to 28% from 21%) at his speech to the joint session of Congress on 23 February 2021. That too will slash EPS growth in FY2022 (Oct 2021 to Sep 2022). We recommend staying Underweight Equities, and de-risking portfolios. On a six-month view, we would be long US$.    

Delayed Inflation Risks to Be Re-Ignited by Biden Stimulus as Output Gap Closes

Chart based progressive global trading strategies, Chart Partners

Thomas Schroeder

Chart based progressive global trading strategies

Chart Partners

Chart Partners objective is to discover medium-term cycle turns and profit opportunities before they unfold, within structural trends while preserving capital with clear degrees of risk. We have real return ideas. 

Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

Our methodology fuses global market variables and isolates drivers in trends. We specialize in FX, index trade in NY and Asia with a focus on Asian stocks. 

Dow Jones Industrial Average / Technical Analysis

Fresh sell resistance is the tactical focus after seeing the reversal from short levels and DJI cracking key support that was touted to trigger an SPX fall and now piercing the critical SPX wedge support that will open up the downside.<div>Short equity (sell risk and put on protection), long USD and lower yield call panning out. Equity shakeout on the back of divergence and a USD short squeeze in the making.</div>

Fresh sell resistance is the tactical focus after seeing the reversal from short levels and DJI cracking key support that was touted to trigger an SPX fall and now piercing the critical SPX wedge support that will open up the downside.Short equity (sell risk and put on protection), long USD and lower yield call panning out. Equity shakeout on the back of divergence and a USD short squeeze in the making.

We have a call to sell risk at the top of the SPX wedge near 3,860 for a pullback and see the DJI as the weakest link that would break support and spearhead an SPX pullback. USD is geared for follow through strength concentrated in EM, Asia and the Euro.Bet was to short the DJI above 31k (met) as the weaker link and Underperform vs the SPX. The next bet to short was the Russell near 2,190 (met) for a test on the 2,000 pivot support.SPX near pivot lies at 3,815 and the bigger wedge and pattern pivot level at 3,750 that would usher in a correction.

We have a call to sell risk at the top of the SPX wedge near 3,860 for a pullback and see the DJI as the weakest link that would break support and spearhead an SPX pullback. USD is geared for follow through strength concentrated in EM, Asia and the Euro.Bet was to short the DJI above 31k (met) as the weaker link and Underperform vs the SPX. The next bet to short was the Russell near 2,190 (met) for a test on the 2,000 pivot support.SPX near pivot lies at 3,815 and the bigger wedge and pattern pivot level at 3,750 that would usher in a correction.

United States

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Dow Jones Industrial Average (INDU INDEX)

Dow Jones Industrial Average (INDU INDEX)

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