25 Oct 2021

Let us start by looking at the strength of the current market rally following a 20% correction, against the backdrop of all post bear market rally’s since 1950. As you can see the rally post the GFC in 2009 was way above trend. Well what do you think you get by way of rally when interest rates are zero – you guessed it. You get the mother of all rally’s.

 Some things that caught my eye. There is a very real feel that the Chinese economy is slowing down. They printed a poor GDP number last week but there just feels like a lot of worry around with the power shortages being experienced and of course the worry about the property market as illustrated by Evergrande and its struggles to honour its humungous $300 billion debt obligations.

While the world was battling through the Covid crisis last year Chinese markets were on fire. We are now seeing a selloff in some of the major commodities which provides a very interesting backdrop to the inflation discussion we have been highlighting. I think the charts below highlight weak demand.

Finally take a look at Steel, it never quite made a new high.

From the charts above I want to bring some balance to the inflation trend that I have hopped on lately. We need to keep a very watchful eye on these commodity prices as continued weakness is likely to spell economic weakness for China and trust me, if China is weak the rest of the world soon becomes weak. Naturally a global economic slowdown will take away some of the pressure on central banks to raise rates. We are traders here so we need to be on the prowl and be ready to change our minds should the facts on the ground change.

While I am on the subject of central banks, the RBA is continuing its fight with the bond market. It seemed that the RBA would not be defending its 0.1% cap on the May 2023 bonds, well that was until Friday when the RBA went bid and bought up $1 billion of the bonds driving yields down close to the cap level. This story is not over, let’s watch it unfold in both the bond and currency markets.

An interesting chart by Tom McClellan follows. He is highlighting the divergence in the spread of the US 10yr versus the German Bund 10yr. You can see that each time there is a divergence the Dow Industrials have a light wobble. We have a divergence at the moment so perhaps a little wobble. I am short still.

A chart that caught my eye is the Brazilian Real that is having a tough time. I think this is a chart that has the prospect to go much higher.

Finally I have to say Donal Trump is just a force of nature. His SPAC (special purpose vehicle) which will IPO his new social media business next year started trading last week and was up more than 350% with a market cap well over a billion dollars. I wouldn’t be surprised if he makes more money from his social media interests than all his property interests ever made.

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