Short term market outlook

Since we are coming out of a period that has been completely dominated by Covid for the last 18 months, it might be time to take stock of the current situation we are in and what might drive the markets over the next few months.

Inflation

The biggest influencer this week will be the US inflation figures.

Inflation – US figures

May-Jun 2021 = 0.905%

Jun-Jul 2021 = 0.474%

Jul-Aug 2021 = 0.274%

Aug-Sep 2020 = 0.246%

Yearly

Aug 2020 – Aug 2021 = 5.20%

Expected 5.3% YoY and 0.3% MoM

Eventually inflation figures will need to surprise to the downside (as expectations keep rising). After ‘persistent’ inflation driving market moves over the last 6 months it wouldn’t take much for a print to be lower than expected.

Looking at the previous monthly figures, the has been a drop from 0.905% in June to 0.474% in July and 0.274% in August. A further halving of the figure would come in at 0.13% against the predicted 0.3%. This would drop the year on year figure to 5.0% and everyone would breathe a sigh of relief. This could result in a rally in tech coinciding with recovery and cyclical

US500/Markets

The blowoff top is still possible but requires a favourable inflation figure either this month or next month. I see highest probability of either rise or move sideways in the markets over the next 2 months.

Oil

Oil has powered up on recovery hopes and growing realisation that there is a tight supply market. The general belief is the tight supply is due to OPEC+ being disciplined with production quotas, ie there is only a man-made shortage of supply. The west, especially US has allowed the power to shift decisively towards OPEC by reducing their own output and investment.

This growing realisation has made traders more confident (which also is boosted with forward hedging rising due to the energy crunch see below).

China imports 10% down in Sep which coincides with increased imports to the US which facilitated increased inventory levels. This slowed the rate of increase in the price of oil

Oil is already high and could spike higher if the inflation situation improves as above. I can’t see it moving down until there are worries regarding economic growth. In the absence of both the above it will probably trade $80-$90 for a while.

Gas

Temporary supply panic has caused the current situation. Everyone loves a crisis and the press have been pushing the narrative for a while now. In response everyone has been rushing out to secure enough winter fuel so they can reassure that they are prepared for everything. I feel that we are over this now and the problem will fade away until a real structural shortage becomes noticed in a year or two. In the meantime it will not go back down to previous prices and will support decent profits at the producers.

Energy

Prices of energy are going to be an issue going forwards, medium and long term I see this as a huge issue as there are new sectors all competing for the same energy. In the past there were not car owners competing with grandma who is trying to heat her home. Over the next couple of months this is mainly going to be a political issue with government involved in trying to save it’s own arse by capping energy prices or giving/lending taxpayer money.

Gold

Until talk moves from tightening towards printing again I can’t see a trigger for gold to be moving much higher. We need an expectation that governments are printing to ward off a slowdown and ignoring inflation rising. Evidence of stagflation would do this. I feel it is more likely this will happen after some kind of market drop due to an economic slowdown being priced in. The initial drop will take gold down with it but gold would recover on the change in stance from the fed.

Telecoms

Can’t see this moving higher whilst there are more exciting high growth tech stocks doing well. This sector will come into it’s own at some point probably after an initial sell-off when people look for more resilient cashflow.

Tech

Tech will continue sideways unless the worry about inflation changes up or down (or there is an economic slowdown).

Economy

We could still have some good figures as secondary effects of the previous money stimulus feed into economic figures and people’s wallets. The money will run out at some point so there is a recession looming in the future.

Conclusion

Next step of move into cyclical and recovery stocks is underway. Last time came to a halt due to delays in the recovery and delta. This looks to be around a year away at the moment to me.

I am positioning myself for a potential rise in the markets which could happen quickly if everyone believes that the Fed was correct in thinking the inflation was transitory. All sectors would rise in this situation but gold could lag due to lack of inflation or printing worries.