The Latest On The Global Economy: The Olympics Drag Down Financial Markets

Fears within the Chinese Communist Party that excessive pollution will damage their standing at the upcoming Beijing Winter Olympics is helping to drag down global GDP expectations and consequently the US equity market dropped yesterday. But pessimism is evaporating this morning as equities rally, and the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. I don’t expect this rally to sustain itself during the week, as there are several negative factors across global asset classes. The action in currencies signifies $US strength while the US yield curve is bear steepening. Inflation expectations are rising slightly based on measures of Treasuries and TIPS after consolidating earlier in the week. Taken together I expect the S&P 500 to be range-bound over the next few days.

Global GDP forecasts are being cut in proportion to Chinese GDP cuts, as the CCP is allowing energy shortages to drag on production. The reason is manyfold but key is the fact that the majority of China's electricity is coal-produced and that means pollution, at at time when Beijing wants to clear up the skies and ensure the Olympics showcase China as something more than the originator of COVID. The drop in GDP forecasts directly affects MNC revenues and thus the bottom line that investors savor.

Affecting the denominator of standard financial models is the level of US Treasury bonds, and here the politics of Democrat-Republican enmity is raising rates and hurting investors. While Republicans have little intellectual standing to oppose the debt ceiling reset or to withhold government funding, they well remember that the Democrats voted against raising the debt ceiling when Bush was in office (e.g., Senator Biden).

I don’t expect these negative factors to drive the markets substantially lower since liquidity is still abundant both from the Fed and the PBOC, which has been energetically injecting liquidity to maintain confidence in China and keep the Yuan from falling in tandem with other currencies like the €, Yen and many EM currencies. The market will be range-bound for some time as these forces play out. In particular I’m watching consumer confidence since that is key during crises. So far the two measures of confidence in the US are diverging, with one showing a retest of the 2020 COVID lows and the other well above those levels.

My current market positions are in Activision (ATVI), Amgen (AMGN), Apple (AAPL), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).