Weekly Market Update - 25/05/2021
The week that was
While markets were volatile last week, they ended flat, having fallen 3-4% by mid-week and subsequently rebounded. Concerns earlier in the week centered around inflation, the type of ‘unproductive inflation’ that comes from an unbalanced and disrupted global economy. Then later on a fall in US jobless claims and strong manufacturing focused investor attention on the ‘good inflation', where companies are making more products and consumers are consuming more. In that context bond markets were remarkably quiet, especially since some Fed officials appeared to acknowledge later in the week that a strong recovery could result in tapering bond purchases earlier than envisaged. That was seen as an early sign that at least some of the bottle-neck driven price rises could be easing, supported by broad-based falls in commodity prices. In some cases where post-COVID rises have been extreme, like corn and lumber, the falls were quite precipitous (these commodities were down 13% and 23% respectively from their highs before recovering later in the week). Closer to home iron ore futures were down another 10% or so and are now down 20% from their peak a couple of weeks ago. As the geopolitical tensions between China and the US intensify and Australia makes its position ever clearer the Chinese Government is apparently ramping up efforts to hasten increases in supply from Papua New Guinea and West Africa.
All that meant that, here and abroad, energy and materials stocks had the most volatile week, up by a few percent early in the week but ending up well down by the end. Local and global IT stocks bounced back from their falls of the week before while defensive healthcare and consumer staples continued to edge higher. The local banks had a good week and managed to offset the downside from the big miners.
Given the generally positive mix of (slightly) easing inflation pressures and positive economic news, corporate bonds edged higher (credit spreads tightened further) and inflation-protected bonds eased downwards as one year market implied inflation levels fell back last week. This was probably the main reason the more influential fixed income government bond markets remained so calm last week.
However, the real volatility last week, and the focus in financial media, was Bitcoin’s precipitous fall from grace - it was at one point down by almost 50% from its April high and, after an extremely volatile week, ended down 35%. The proximate causes seem to have been the Chinese government hardening its likely regulatory stance on Bitcoin and an increasing sense that bitcoin mining is having an adverse environmental impact. Ironically, this was flagged by Elon Musk who had, only months previously, been a vociferous supporter. For many investors, Bitcoin has been a sideshow, but it has become increasingly accessible to retail investors, even in Australia, and stories abound of local investors who have gotten into Bitcoin at almost exactly the wrong time, for now at least. The total value of Bitcoin in US Dollars is now around $700bn having approached 1 trillion Dollars at its peak. Maybe this will be the apocryphal bubble story that has been lacking so far in this strange market rally.
What we'll be watching this week
Last week we were involved in a few conference panels which discussed, predictably enough, Environmental, Social and Governance investing. It was interesting to note that the appetite amongst advisors is evidently increasing, and because of demand from their clients. It was also pleasing to note that a degree of nuance is entering the discussion and, we hope, this will lead to sensible conversations with clients about not only the attraction of investing sustainably but the necessary valuation work that must be undertaken to ensure positive investment outcomes. We will be spending a little time this week relating the more nuanced issues raised to the way we manage these portfolios.
Inflation, and the extent to which inflation pressures will be persistent, remains a key focal point and we are attacking this one form every angle talking to equity, bond and property investors to get a diverse set of views. For now, they remain just as diverse of the market but we will have a few interesting data points to add following manager meetings scheduled for this week.
A very much related theme we have been discussing internally and with the market participants that we deal with concerns the potential fragility of the global financial system and its sensitivity to dollar liquidity and long-term US interest rates. We are aware that this has been the achilles heel in recent crises (March 2020) and mini-crises (December 2018). So far at least we are pleased to report that we appear to be the chicken little in these conversations. That said we remain fully invested chicken littles and continue to believe that a little bit of productive anxiety is not misplaced, and we will continue to pull on every loose thread in these conversations about the worlds incredibly complex financial plumbing.
Integro Holdings (WA) Pty Ltd
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