The first half of 2021 for stock markets resulted in a positive and substantially similar trend for European and US stock exchanges, while Asian and, selectively, emerging markets disappointed.
Considering that 85% of the increase in the balance sheet total of world central banks starting from April 2020, the positive underlying trend of the markets of Western countries, whose indices have risen on average by 15% since the beginning of the year, is attributed to the Fed and the ECB. The Japanese and above all Chinese stock exchanges, on the other hand, have remained behind, to the point that after 18 months of substantial inactivity, only starting from May the PBOC, the Chinese central bank, has started to inject liquidity into the financial system, but it seems reasonable to believe that the move is late, at least judging by the economy cooling since May, and reflected in the disappointing stock market dynamics since the beginning of the year. Confirming the dichotomy in terms of monetary policy between the West and Asia, there are clear signs of credit tightening from the Fed, which will soon be followed by the ECB, as the German anti-inflation hawks are pushing for a change of strategy. It cannot be considered accidental that the ten-year dollar yields in two months fell from 1.77% to below 1.50%, attesting to a renewed interest in the market for the safe-haven asset par excellence, despite the fact that the major indices of the US stock market continued in the lateral movement that began in March, however, characterized by a constant upward trend, which led to their recent historical highs. Experience teaches us that the phases in which the bond and stock markets are trending in unison are of short duration, therefore the thesis that the large lateral movement of the stock market indices is characterized by a distribution phase destined to precede a correction by a stimulus yet to be defined, would find partial confirmation. It could be assumed that, despite the consensus prevailing among insiders, the US 10-year yield has already reached its peak for the period, close to 1.80%, and that the yield curve is flattening moderately in anticipation of more moderate economic growth in the second half. Taking for example the US S&P 500 index, it is noted that since autumn 2020, there have been five notable sectoral rotations, which have allowed the index to continue upward moderately without significant effect in the valuation of the index.
In this way, the phases of overbought and oversold in the sector have been absorbed through arbitrage between the sectors, but now with the recent recovery of the technology sector, this process appears to be exhausted, proposing the hypothesis of a more generalized stock market correction. Attempting to summarize the fundamental situation, we note the positive surprise of the favorable dynamics of medium and long-term interest rates, which, however, does not depend only on the elimination of fears of a resurgence of inflation but could indicate that the robust growth of the various GDP in the second quarter is set to slow down later in the year. Central banks and Western governments have an extremely delicate task because the enormous liquidity available in financial systems not only supports the securities markets and gradually the real economy, but also represents an essential element to guarantee the constant refinancing of global debt, whose level has only risen since 2008 and will continue to rise given the ambitious public spending plans envisaged on the opposite sides of the Atlantic. Even the fear of an error in their assessment could have negative effects on the dynamics of the stock markets in the short term, an eventuality which the foreign exchange market seems to take into account, given the recent appreciation of the dollar, which coincided precisely with the considerations expressed by the Governor of the FED, regarding future monetary policy decisions. Tactical operations therefore remain conditioned by the doubt whether the indices will continue to consolidate via sector rotation or if there will be a correction of a certain magnitude, between 10% and 12% from current levels, thereby advising to maintain a liquidity level of a certain entity for opportunistic purposes and to continue the selective accumulation in the stock exchange sectors still valued below their pre-pandemic levels, such as the tourism sector in a broad sense and the energy sector, both the traditional and the renewables sector, recovering from a marked corrections from overbought levels in 2020.
Nicola Bravetti Data Source: Bloomberg
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