Geopolitical Developments: The American Worker and the Chinese Communist Party Help the S&P 500, But Cross-Default Clauses Again Put Fear Into Wall Street
Geopolitical developments were mixed this week from a humane standpoint, but slightly bullish for US equities. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in the € & EM currencies indicates the $US is weak. The US yield curve is bull flattening. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. Inflation expectations are rising based on measures of Treasuries and TIPS. Taken together, the market looks set to overcome these concerns and rise moderately over the next few days.
Among the geopolitical developments is a temporary cultural shift in the US, and a likely permanent political shift in China, both of which support the bullish case of US equities. But one of the banes of the financial system is cross-default clauses, which could defuse the global bull market.
1) The US stock market is floating around record highs partly based on BLS data on The Great Resignation, which “showed that more than 3.6 million people quit their jobs in May,..A report by Monster.com indicates that a whopping 95% of workers are considering leaving their jobs…”, per Fast Company. This new phenomenon is catalyzing automation, efficiency demands and rationalization, boosting productivity while workers get a break from the constant uncertainty regarding keeping their gigs (jobs), and dealing with disruption in the private sector.
2) And bullishness on America is rising with China’s anti-business clampdown, which shocked China watchers (i.e., the Washington—New York establishment) . Economist Stephen Roach writes in Project Syndicate “The Chinese government has taken dead aim at its dynamic technology sector...now distrust is creeping into the business sector...” The US equity market is a potential safe haven from Asian statism as investors rethink global capital flows into Asia, in favor of the US.
3) A potential time bomb that could destroy global bullishness could come from Chinese property developer Evergrande. According to Reuters, “Late payments could trigger cross-defaults as many financial institutions have exposure to Evergrande via direct loans and indirect holdings through different financial instruments.” The story here is that “Investors became worried after a leaked letter in September showed Evergrande had pleaded for government support to approve a now-dropped backdoor listing plan, warning it faced a cash crunch.” Cross-defaults are a key issue in Italy as well, and can easily cause the dreaded “contagion” that temporarily sinks the global financial system.
4) Intuitively the Delta variant should hurt markets just as it hurts people, yet the underlying story is that even vaccine inequality isn’t playing out equally, as some poor nations are getting stronger despite the variant, and others weaker. Dawn notes the IMF’s positive statement re Pakistan and implicitly negative one re India: “Projections are revised up for the Middle East and Central Asia due to robust activity in some countries (such as Morocco and Pakistan), partially offset by downgrades of some others...” India’s growth downgrade can be traced to PM Modi’s superspreader events, which Pakistan appears to have avoided. The upshot for markets is that ROW growth is coming from multiple sources and not synchronized, thus sowing the seeds of a long-term bullish cycle.
Yesterday I added a position in Facebook (FB), and added to my existing position in MKS Instruments (MKSI). My other current positions in the market are long holdings in Korn Ferry (KFY), Titan Machinery (TITN); and a nearly hedged position (net long) in the SPX (UPRO and SPXU).