Hope trade fades
Summary: Asia stocks sliding, following Wall Street lower as economic realities begin to set in, with market sentiment starting to catch down to fundamentals.
The sharp rebound from March lows is beginning to stall as record levels of uncertainty are juggled with extended valuations. With optimism priced and upside momentum fading, it appears trading on hope is being replaced with caution and a local top may in for equities. The disconnect between the real economy and equity markets has been surreal. For the S&P 500, P/E multiples derived via forward earnings estimates are at levels last seen in 2002, post the dotcom crash when the index was still ~30% from its eventual low. Although that period teaches, valuations can remain departed from reality for longer than is comfortable. Now heightened geopolitical tensions, mounting second wave risks and labour market destruction are eroding the expectation of an aggressive V shaped recovery that has been priced by investors. The market has been discounting a swift return-to-normality, but in reality, the post-pandemic outlook is likely not one of mean reversion on many fronts and that uncertainty is not reflected. If we are to live with rolling outbreaks until a vaccine is delivered, it is increasingly hard to justify current valuations. And as new infection waves materialise in China and South Korea, the “reopening reality” of prolonged distancing and a slow return to normal is being considered. It feels like the decisive moment for this bear market rally is approaching.
A raft of billionaire investors have also publicly denoted stretched valuations, a dire economic outlook and a 1999 style speculative fever, will the explosion in retail account openings and Robinhood traders piling into the stock market heed the warning?
Overnight, Chairman Powell also joined the cautious chorus that has seen sentiment dampened in recent days, again reminding investors not to confuse liquidity with solvency. ‘But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems’. Whilst the worst of the health crisis may be behind us, the economic crisis remains. Powell also pushed back on the notion of negative interest rates and called for ongoing fiscal support for the US economy. This is in line with our view that stimulus packages to date represent a bridge to the other side of the pandemic outbreak, but more will need to be done when it comes to rebuilding the economy. When it comes to NIRP, we see the Fed experimenting with yield curve control to anchor long-term rates, prior to NIRP.
Australia Jobs Report
The much-anticipated April jobs report delivered a surprise beat on the headline unemployment rate, which came in at 6.2% vs. 8.2% expected, despite a record fall in employment as almost 600K jobs were shed in April. However, do not let this beat on the headline fool you, below the bonnet the report was every bit as dire as expected and Australia has by no means dodged a bullet.
The participation rate, which refers to the size of the workforce as percentage of the working-age population, fell to levels last seen in 2004, thus masking the true hit to the labour market as those individuals dropped out of the labour force all together. If the size of the workforce had not diminished by almost half a million people, the unemployment rate would have surged to 9.6% in April, representing around 1.3mn unemployed.
As we have previously noted, the JobKeeper subsidy is also artificially supressing the headline unemployment rate. The ABS has said “people who are paid through the JobKeeper scheme will be classified as employed, regardless of the hours they work (e.g. even if they are stood down).” Prior to COVID-19 a member of the workforce had to work at least one hour to be considered employed. That is why we look to hours worked and underemployment in order to gauge the real impact of COVID-19 on the Australian labour market.
Hours worked plunged by 9.2% in April. The underemployment rate (which refers the number of people who are employed but who want to work more hours) rose to 13.7% and hours worked dived 9.2%. Underutilisation, another measure of labour market slack, (which refers to people who are either unemployed or looking for more hours of work) rose to 19.9%. The above illustrating that the impact of COVID-19 on the Australian labour force has been substantial, with the most significant pain being felt via reduced hours.
According to the ABS, 2.7 million people were affected by either job loss or reduced hours between March and April. Out of that 2.7 million, 1.8 million people worked fewer than their usual hours, or no hours at all, for ‘economic reasons’:
- And over 750,000 did not work at all; and
- over 1 million did some work, but worked fewer hours than usual.
Including those workers who would have been considered unemployed prior to the ABS classification change AND those who left the labour force all together would see the headline unemployment rate well above 10%.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.