My own sense is that we’re moving into a more dynamic, arguably unstable, choppy market regime. Macroeconomic factors will interact jaggedly with bottom-up numbers to create a more unsettling environment where many players start quietly taking profits and wait for the next signals. I still think a market correction of around the 10% level is due, but I’ve been thinking that for a while to no avail! My sense is that investors are all collectively trying to work out if inflation will start to trend well over 5%. If it is and central banks are aggressive in their actions, we could see a bigger sell-off.

Yet within this choppy market – which could still move forward – we’ll see lots of cross currents. I’m afraid emerging markets will have a tough time – more on that below. The energy sector will suffer from whipsaw-like moves and tech stocks might bob up and down.

In this vein, it’s interesting to see the sum up from analysts at Deutsche Bank which does a nice job of delineating the current trends of faltering momentum across key assets. They identify three divergences: “developed market equities have hovered near record highs, but momentum signals have turned lower across several other asset classes; equity volatility remains at the lower end of its range since the start of the pandemic even as bond and FX volatility have risen sharply; as equities hover near record highs, the last two weeks saw a near-even split between positive and negative performers across sectors. Our Late and End phase baskets have been moving higher recently while the Early phase basket has fallen sharply. Our [Deutsche] measure of aggregate US equity positioning remains elevated with bullish option volume in large caps remaining strong in particular.”

So, the big message seems to be stay tight with US equities ??

Variant Perception last week talked about a useful measure worth looking out for – “For equities, one of the simple regime indicators we use tracks moving average crossovers on S&P 500 earnings.  Whenever the 10-week moving average of S&P T12M EPS is higher than the 40-week moving average, we define it as a structurally bullish regime. During the bullish regime, S&P drawdowns tend to be smaller than in the bearish regimes…. We are not too worried that EPS trends are about to turn negative.  US total manufacturing new orders growth is still very strong, which supports EPS growth. We think investors should still look to maintain equity allocations, but can consider reducing some tactical allocations in light of growing cyclical headwinds.”

The message for emerging markets assets is much less rosy. Or at least that’s the view of SocGen’s EM analysts. They report that “ EM local assets are likely to face mounting challenges over the near term, stemming from heightened inflation, market tensions regarding the US policy rates lift-off, rising fiscal burdens, shrinking real growth differentials, and diminished capital flows. These forces exert downward pressure on EM FX, and upward pressure on EM rates and bond yields, particularly in 1H22…. Developments in China will [also] contribute to global growth deceleration, anchor medium-term global inflation, and keep the CNY trajectory relatively stable.”

EM equities are also suffering for a more short-term reason – EM earnings look like they might be plateauing and in some cases even dipping slightly (HK). “The only market to break this pattern is Taiwan where growth has slowed down, but not stalled. Is this slowdown in upgrades a sign of previous exuberance – did analysts get ahead of themselves? Or are we set for a slowdown in global economic growth? Whatever the case, the reality is that the earnings growth upgrades which supported rising equities in Asia have stalled, and this could be a precursor of a potential tapering off in equity performance as well – a risk we believe investors should keep in mind.”

Last but no means least, thanks to Paul C for the Twitter graphic below.

This emphasizes one of the great truths of the carbon transition. For all the talk about the government’s pump-priming of the process, the reality is that there is more than enough private capital to go around. In fact, I think private capital deployment will massively dwarf the state’s funding in most verticals. Take AgTech and Foodtech. This chart suggests that VC investment in European startups already dwarfs EU AG subsidies