In lieu of my own assessment of the smartest guys in the room this week, here is an alternative from ZeroHedge. In my view, a commodity crash and equity correction are dead ahead as China slows much more than the market is pricing for. Inflation is not the risk, deflation is.
Morgan Stanley
We start with Morgan Stanley, which yesterday published its latest Global Macro Forum slide deck (available for professional subscribers), and where the bank’s chief cross-asset strategist Andrew Sheets warns that equity market internals have continued to follow a “mid cycle transition”, a process which usually ends with quality stocks – like the FAAMGs market “generals” – getting hit, “which poses outsized risk to the high-quality S&P 500” through October.
Sheets frames his pessimistic view by disclosing the five themes which he believes will define markets though year-end. These are:
- Policy divergence and the start of tapering: MS expects the Fed to signal its intent to taper at the September meeting. As central bank policy becomes less easy, it also becomes more divergent. This will provide support for long DXY, short PLN/HUF, short US duration and gold, caution on US and Taiwan equities.
- Vaccination divergence: The world has two strategies to combat COVID-19 vaccination and suppression. The Delta variant has made the latter difficult, increasing risks to growth in regions with low vaccination rates. The bank sees this as bullish for EU equities.
- Valuation divergence: 2021 to date has seen a wide adjustment in valuations. Sheets’ advice: “Focus on areas with greater levels of valuation adjustment. We add Brazil versus EM equities to our top trades.”
- Echoes of 2004: Sheets thinks that 2004 offers a useful guide for a ‘mid-cycle transition. He suggests taking default risk over spread risk and like loans over bonds in credit.
- Doing things > buying things: The pandemic saw demand for goods jump and demand for services collapse. As the recovery continues, expect a reversal. We think this supports energy > metals, and are cautious on US consumer discretionary.
