First published in the Daily Maverick 168 weekly newspaper.
For a few moments on 19 July it felt like we might have reached that tipping point. The Eurostoxx 500 had its worst day-trading session of the year. The Dow was down more than 2%, its worst one-day drop since February. With valuations increasingly detached from economic realities and leverage pervasive, had we reached the moment when markets capitulated?
Before we answer that, it is worth interrogating what has been happening over the last few months in financial markets.
To start with the US 10-year yield, the first few months of this year saw increasing concerns about inflation and money creation leading to runaway wages and prices in the US.
It was feared that the unprecedented liquidity released by the Fed was debasing the dollar and could have hyperinflationary consequences, compounded by tight labour markets distorted by stimulus cheques, hamstrung supply chains and soaring commodity values. In April the 10-year yield duly spiked (yields move inversely to prices) as investors shunned Treasuries.
And then something changed. The data did not change (US CPI prints continue to run ahead of expectations) and neither did the soundbites coming out of the Fed (wary of the inflation narrative, and maintaining this is a temporary post-lockdown aberration replete with distorting base effects). Yet from early April the bond market changed tack: bonds have since strengthened and yields tightened, all the way back to levels last seen in February.
This runs contrary to an inflation hypothesis and sees an economic slowdown, if not an outright recession, looming. The US bond yield curve, as expected, duly flattened.
Equities, however, begged to differ. The seemingly inevitable post-recession economic boom was priced in. The “rotation” trade away from tech and towards the unloved sectors of the market, all but priced for bankruptcy. Energy companies, airlines, cruise line operators, and brick and mortar retailers enjoyed a stellar recovery.
So what was happening? An economic expansion with the potential to overheat (as the equity market was saying)? Or was the economic growth story overbought and the day of reckoning would come when the stimulus cheques stopped, the unemployment benefits ended at the end of September and when the base price effects were fully baked in (as the bond bulls would have it)?
News of the Delta variant resulting in a rapid resurgence of Covid-19 infections in the most vaccinated large country in the world, the UK, posed the question: what if, as has widely been assumed, vaccinations do not mean that life will be back to normal come September?
Markets barely needed an invitation to re-rate. Vulnerable sectors such as energy moved down 10% into correction territory.
Then the rest of the week happened. This was evidently not the Minsky moment. After equity bulls went back into the market on 20 July, buying the dip, a slew of earning results on 21 July from bellwethers such as Coca-Cola and Verizon were far above expectations. Markets rebounded even further.
Where to from here? Markets have been trying to decide between two mutually exclusive narratives. First: the US and Chinese growth engines pulling the global economy out of the pandemic, with the potential for inflation. Or: vaccinations are not the panacea they had been assumed to be and we are not out of the woods yet.
As ever, it will probably be neither, and a bit of both. The Fed will ensure markets have enough liquidity to coast through uncertainty; sectors will battle, but state support will prevent zombie firms from falling over entirely. Vaccines are not a silver bullet. Expect more restrictions and ongoing concerns about variants.
It is uncertain as to where this leaves SA. Isolated, is a best guess. SA had its own Minsky moment last week as divergent economic and social realities became painfully apparent. A reversal of its dire economic fortunes is now more critical than ever.
A rapid global recovery would be helpful to this end, but SA may have to endure something rather less exciting. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores until 24 July 2021. From 31 July 2021, DM168 will be available for R25 at Pick n Pay, Exclusive Books and airport bookstores.