FNArena’s Weekly Insights – May 03 2021

In this week’s Weekly Insights:

-The Trend Remains Up
-CSL Optimism Creeping Back In
-Conviction Calls
-FNArena Talks
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

The Trend Remains Up

Now that April has been replaced by May, and the share market has put in another strong performance (up 20%-plus since October ex-dividends), investor worries about high asset prices and the risk of a downward correction are once again rising.

While a temporary pull back does not necessarily need a trigger or a reason, a deeper correction does require a fundamental shift. In the current context, I believe such a shift would either be triggered by sharply rising bond yields in response to the market’s changing view on inflation or by corporate profits not living up to expectations.

Bond yields rose sharply during the first quarter of the calendar year, but tensions have subsided and the general view remains that whatever comes our way in terms of consumer price inflation is simply off last year’s low base and caused by restrictions on imports and international supply chains that will be resolved in due course.

Last week, economists at Handelsbanken summarised the inflation question as follows: “A spike this year, but the inflation scare is hype”. Bond markets can still become more volatile, of course, as short term economic data remain notoriously difficult to predict, but for now the inflation scare has subsided. Bond yields the world around are lower than in March.

And central bankers have kept repeating their mantra that inflation is still ephemeral, and will be, unless labour markets are a whole lot stronger. Another point made by Handelsbanken is the global pandemic is causing long-term damage to employment rates. Both the FOMC and the RBA locally want to see much tighter markets for jobs.

Then again, there is no such thing as ‘never’ in financial markets. Robert Kaplan, president of the Federal Reserve Bank of St Louis, has become the first to openly disagree with the ‘nothing to see here’-message from Fed Chair Jerome Powell. And the Bank of Canada has announced its intention to start reducing the size of weekly bond purchases, otherwise referred to as ‘tapering’.

Bonds selling off sharply earlier in the year (yields rising) caused a few ructions here and there, predominantly for quality and growth stocks trading on higher valuations, but it did not pull markets in a downward spiral. Markets merely traded sideways while exhibiting a lot of volatility. Next time may not necessarily be much different.

A much more dangerous threat will come from corporate earnings not living up to expectations. Here the importance of the results released by Australian banks this week cannot be over-estimated.

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