The Mass Mess

The week leading up to the first week of October was confronted with numerous headwinds. We have the Evergrande debt crisis, the Fed Tapering schedule and the debt ceiling fight. As we shift towards a new week, none of these dark clouds has dissipated.

Adding fuel to the fire is more uncertainty ahead. Whenever things look brighter, more negativity builds up. In this series, we aim to discuss 3 sticky points to focus on the week ahead.

Let’s dive into the details.

#1: Hold on, Guys, Let’s take a Pause on Infrastructure

It was a sprint than a marathon, and subsequently a meditation session. That’s best characterised the momentum of the infrastructure bill. The early days were drowned in enthusiasm with bipartisan support on both isles. Then, however, things cooled quickly as divergence occurred when the “soft” infrastructure bill was released as different factions of groups within each party appeared to disagree on many areas: from the nature of the project to the size of the package.

Next, it came to a still as President Biden spoke on Friday evening to delay a critical vote on the infrastructure bill, a key pillar of his economic agenda, signalling the rift of consensus between the progressive and moderate Democrats.

Speaker Nancy Pelosi had her hands tied as she moved to delay the vote. On Friday, a visit to Capitol Hill had shifted the gear from a long run to a self-reflection journey. As President Biden spoke to the reporters, he believed that when the bill is approved is not a key concern as everything will fall in place.

The Big Disconnect

The much anticipated $3.5 trillion infrastructure bill will massively enlarge the US’s social safety net and give the fight against climate change a big boost. Nonetheless, the moderate Democrats have shared their concern on the size of the bill and aim to negotiate on a smaller price tag. Although their expectation is $1.5 trillion, President Biden has indicated a willingness to lower the total bill to $2 trillion.

On the flip side, the progressive Democrats are encouraged to envision a more extravagant bill amounting to $6 trillion. They spelt out their stance that they had already given multiple compromises along the way. But, more importantly, there are splits between the policy areas of healthcare. This prompted progressive Democrats to consider a vote against the infrastructure bill.

Pika World believes that the deep division within the Democrats requires more time to resolve, and the conclusion in the negotiation process will take more time. As such, we are setting sight on around mid-October or towards mid-December, where many members have more urgency to pass the bill before the year-end.

As always, things look bleak and almost impossible till the boat reaches its course and straighten the inevitable path ahead.

#2: Wait a minute once more, so the Bitcoin ban is a FUD play?

The rally by Bitcoin and alternative cryptocurrency on Friday did not go unnoticed. This is after Uncle Powell gave his nod on the industry. As he began his Congressional hearing on Thursday, he shared his thought that he sees no plan to ban cryptocurrency.

Instead, he sees stablecoins somewhat similar to money-market funds and bank deposits, given that they are now outside any regulatory framework. This positive outlook stood in dark contrast to Gary Gensler, Chairman of the SEC, which is known to be a tough man against Crypto for the recent months.

To put into perspective, he had often spoke of the crypto tokens as securities that will require broad-based supervision by the SEC. He further suggested that Uniswap, an automated trading platform, should fall under SEC control.

A Relief in Dark Times

The Crypto World had been under tremendous stress for the past weeks. First, China had fired another shot of warning to her citizens not to trade or make a transaction in digital currencies, a move towards banning all forms of commercial transactions using cryptocurrency in China. Then the Evergrande debt crisis heightens the risks of spillover effects into the Crypto markets.

On the backdrop of these noises is the call by many global financing organisations on the risk cryptos can pose on the general financial stability of the economy. For example, the IMF had stated in a post on Friday that regulators should take a new look at cryptos. Many of such platforms lack the required operational vigour and a framework in governance and risk control.

Essentially, they are worried that the rise of Cryptoisation can dilute the efficiency and ability of central banks to implement monetary policy in the real world. In addition, of course, the concern on environmental impacts through crypto mining has also brought attention to the forefront.

Pika World is delighted that Uncle Powell’s remarks had brushed off some dust over the swirling concerns as a relief rally took place, pushing Bitcoin to above the Mid-September level after falling rapidly to around $40,000 last week. In addition, it rebounded from mid-July lows of $29,800.

#3: Here comes the Earnings and Jobs

Before the calendar flips into the new year, what’s hasn’t been accomplished could perhaps have a rough footing as we begin the first month of the last quarter. But, from perhaps rock n roll to K-pop and transition to Jazz, the mellowing tone of the music continues for the equity market.

Portfolio managers felt the summer heat as they returned from holidays and entered the fall season, much like the S&P 500 that registered a negative return for September. This brings the total return by the index for the first 9 months to around 15.92%.

There is now a renewed focus on the earnings reports as the season begins underway. However, as some analysts believed, the bulk of the gains in equities is behind them as much of the good earnings news is already anticipated by the robust upgrades in analysts’ estimates. Thus, the room for error or disappointment is narrow.

Downwards Revision is Still Possible

Any indication of a fall in forecasts for the GDP will dampen the optimistic estimates of future earnings. However, with the rising inflation that tends to weaken real wages and eat into the profit margin, it seems that the first half of 2022 may be brighter than the second half.

Consumer spending remains volatile to give a clear signal on the health of the economy. According to some analysts, the personal consumption expenditures for August was relatively flat from April. Consumer spending was up by around 0.4% in real terms only after falling big by 0.5% in July. The see-saw figure doesn’t spell confidence for investors.

As we see a slowing consumer spending, the third-quarter GDP growth might lose some steam to an annual rate of 3%, far below the 2^nd quarter final revision of around 6.7%. Notably, the 3% growth estimates took into account Pika World last updates where we shared the possibility of high inventories that could add to the growth, which is also well ahead of the Fed’s Bank of Atlanta’s most recent estimate of 2.3%.

Pika World will be eyeing the highlight of the coming week, which is the September employment figure to be released on Friday morning. It has always been a market mover, as the figure hints at the monetary policy path by the Fed to ascertain the degree of labour market recovery.

During his Sept 22 press conference after the FOMC meeting, Uncle Powell had highlighted that only with a “reasonably good” employment report, the panel would then be empowered to begin the $120 billion tapering process. The next FOMC meeting is on 2-3 Nov, and this will thus be the last job report and could be pivotal for the market sentiment.

The human spirit has always been one that fights against odds and turmoil. So, just like the sparkles of the rainbow after a shower and the sense of tranquillity as a storm unsettles, Pika World remains cautiously optimistic of the equity market as we believe the market is well equipped for various exogenous shocks towards the end of the year.