09 JUL 2021

Markets/Macro: Six Thoughts on the Market

 


This article is from the weekly markets/macro comment by Tony Pasquariello, Global Head of Hedge Fund Coverage, Global Markets Division, published on July 6, 2021. The full note and Tony’s weekly analysis are available on Marquee’s Global Markets Insights



By Tony Pasquariello

Six bigger picture thoughts after not staring at screens for a week:

Tony Pasquariello

1. The reflation trade continues to ebb across the rates complex, and post-payrolls one can argue the core of the FOMC now has some cover to wait and see how labor market disruptions play out in H2’21 (while noting I find it very interesting that continuing jobless claims are declining much more quickly in states that ended top-up benefits early). That said, when core PCE prints 3.4% y/y (the highest reading since 1992) and commodities continue to surge higher (pull up a chart of BCOM), it strikes me you’re supposed to keep an eye on the reflation ball in the places where it’s still working, while pressing the “middle seam” framework for sector selection.

2. Said another way: for all of the ink devoted to value-vs-growth and cyclicals-vs-defensives—and, for all of the hand wringing around what signal the bond market is sending—if one were simply long of some FAAMG and long of some BCOM, they’d have a remarkably steady hand amidst the oddities that characterized the game in Q2. 

3. Pulling it together, having one foot in NDX and one foot in RTY, which is perhaps essentially S&P exposure by any other name, seems favorable to some investors.  Looking back, the right judgement coming out of the FOMC’s hawkish surprise was to go for the accelerator in US equities; as they say in the trade, fortune favors the bold.

4. As we look forward to the stock market in the third quarter, my guess is the temperature comes down on both the supply and the demand side of the equation. But, if I had to pick a side, I suspect it’s the demand story that ultimately proves to be more sustainable, particularly given the renaissance in corporate repurchase.

5. A lot had been made of the richening of S&P put-call skew, which, in contrast to other measures of risk premia on the dashboard, was conspicuously flashing red. I’m not convinced there was a big signal here. To my eye, with most financial actors carrying significant levels of length these days, the marginal option trade was biased towards portfolio protection. 

6. Judging from the discourse of recent weeks, there may be a scenario in which US/China relations worsen (side note: the book 2034 is not light reading on one’s break). And there may be a significant dose of heat coming down on China regarding COVID transparency and disclosure. I don’t want to make an investment implication here—as a wise manager once said, “economics trump geopolitics” — but, this variable may play a larger role over time in the financial markets.

As you can probably tell, a week of vacation didn’t result in a grand revision of market views. As the old saying goes: "before enlightenment: chop wood, carry water. After enlightenment: chop wood, carry water."