Markets stocks

Leadership Struggle (And Revisiting The Austin Powers World)

Risk appetite appeared to wane a bit Thursday with stimulus talks still deadlocked in Washington. At this juncture, Nancy Pelosi and Steve Mnuchin are having a hard time agreeing on what was and wasn’t said during a phone call between the two on Wednesday. That would appear to bode ill for a breakthrough.

Still, the market’s base case remains a compromise and I suppose that until the stalemate starts bumping up against the assumed limits of the emergency funding Donald Trump plans to use for the extension of the federal unemployment supplement, equities can conceivably keep climbing the wall of worry. That said, Pelosi has made it clear that discussions around another virus relief package cannot (and should not) end up entangled with broader government funding discussions. That means the closer we get to mid-September, the more perilous this will be.

“At this point, the only hard deadline Congress faces for action is September 30, when the fiscal year ends and the government shuts down if Congress hasn’t passed new spending legislation”, Goldman reminds you. “If a broad fiscal package remains unresolved by that point, that deadline might force an agreement”. Or it may force a selloff if there’s no agreement. Either or.

If the S&P can manage another gain, it will close at a record. And that will mark an incredible recovery, as documented in “Resurrection“. But, the abrupt change in leadership discussed in that same linked ode to the fastest round-trip in market history has folks talking on Thursday.

“The momentum to value rotation of the previous sessions reverted [Wednesday]”, JonesTrading’s Mike O’Rourke notes. “There was no specific reason”, he went on to say, adding that,

The FAAMG leadership drove 42% of the S&P 500’s gain and 48% of the Nasdaq 100’s gain. FAAMG leadership outperformed its S&P 500 weight of approximately 20% during the recovery. The group was responsible for 28% of the S&P 500 market capitalization gain from the March low. The feat was made more impressive by the fact that FAAMG was only responsible for 14.2% of the decline from the February peak to the March low. As we are all well aware, that has resulted in a narrow, but notably more expensive, market leadership contingent.

Indeed. The question now is what happens if the same handful of stocks is asked to once again shoulder the burden, but can’t.

This is why it was so notable that cyclical value suddenly decided to drop the baton on Wednesday. There are any number of ways to visualize that. The figure (below) is one.

“It’s not recommended to change drivers when your car is hurtling at speed toward a junction, yet that reminds me of what US stocks are attempting to do this month as their all-time high looms large”, Bloomberg’s Cormac Mullen wrote, cautioning on a possible double top. “If laggards can’t lead the market higher, and growth stocks falter, then the index rolls over”.

That’s your talking point in equities land.

SocGen’s Kit Juckes offers another interesting bit on Thursday. “August will probably end in storms, for markets and the English weather [but] for now, the heatwave continues”, he began, before noting that “the correlation between the euro and equity markets is higher than at any time since before the Fed’s taper tantrum and the ECB’s move to negative rates and QE”.

In bonds, market participants will be looking to US jobless claims for the latest (semi)real-time read on the state of the labor market, which is either in terrible disrepair or absolutely booming, depending on whether the person you’re listening to happens to work at 1600 Penn.

Mike Pence on Wednesday evening went so far as to claim that the May, June, and July jobs reports allow him to argue that the administration has created more jobs in the last three months than Joe Biden did during his time as vice president (and, yes, Pence actually said that).

A generous interpretation would be to call it a bold claim. A more straightforward assessment would be to call it an outlandish assertion considering the circumstances and wholly insulting to the 13 million people who are still jobless after the US labor market was nuked in April to the tune of ~21 million.

In any case, hopefully jobless claims will fall again, especially considering gridlock in DC and the limited scope of the president’s limited unemployment assistance.

Panning out to a 30,000-foot view, the world remains a very, very interesting place in 2020. Years ago in these pages, I argued that we live in an “Austin Powers world”. I doubt many readers remember that post. Here’s how I described it in October 2017:

I spend quite a lot of time marveling at the extent to which the current political (and geopolitical) landscape is characterized by something that approximates sheer absurdity.

It’s everywhere you look. It’s like something out of a comic book. Or maybe a fusion of a James Bond film and an Austin Powers sequel. There’s real danger but at the same time, the central figures are so laughable that it’s difficult to accept it as reality.

It was true then, and it’s even more true nearly three years later. Rabobank’s Michael Every underscores the point on Thursday. I’ll leave you in his capable hands via the following short excerpt from his global daily note:

We live in a world where all can agree on very little – but one thing that should be clear is that it’s all very James Bond. Charismatic billionaires; Cold War; secret agents; skulduggery; poisonings; spy apps in innocuous devices; military build-ups and warnings of hot war; police crack-downs; and, of course, a killer virus. Ironically, Bond himself is absent because the latest movie iteration, “No Time To Die”, has been delayed because of Covid-19: when it eventually comes out, is it going to be a wilder ride than what we already see in real life?


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