May 28 2021

The Next Taper Tantrum

What a run so far in 2021. US growth took everybody by surprise, and was much stronger than expected. It looks like fewer good surprises are coming ahead though.

Inflation, or not. Central Bank officials start discussing about reducing the Fed bond purchase program ($120bn in monthly assets), or tapering, not to mention raising rates for now. Whether they’ll walk the talk, or just talk the talk remains to be seen.

What happened at the latest taper tantrum in May13? Then-Federal Reserve Chairman Ben Bernanke told lawmakers the central bank was considering a slowdown in its purchases of government bonds, without actually announcing such a change in policy. UST10y went up to 3% from about 2%. Emerging Markets, such as China went down by 15% to 20%. However, there was a limited peak-to-trough 6% impact on the S&P500. A detail of history.

What is different this time? Some EM countries shifted to a money-tightening stance already, such as China and the Yuan has been strengthening. EM markets didn’t see large inflows of late, quite the contrary since mid Feb21. In China, market valuations came down by 8% to 10% from Feb21 peak, and even by ~30% on tech names.

Storm in a tea pot? Knee-jerk reaction is almost guaranteed, should the Fed decide to call back its support program. Most people would like to see a repeat of 2013, valuations are lofty and priced on the assumption of extremely low rates and lenient monetary policies. It is unlikely to last though. First, we are hardly through the end of the pandemic, and stimuli are still plenty. Secondly, Governments shelled massive amounts of debt that they have to carry through with rates under-shooting inflation for as far as anyone could see. Thirdly, some bubbles were healthily pricked over the past few weeks already.

There remains that sentiment is very cautious. Market is still tilting on the bullish side but mostly trades sideways, as the good news is essentially out. Positives can still come Europe, which is eventually turning the pandemic corner, or from financial stocks who benefit positively from higher rates. However, I’d be cautious on tech assets, as a combination of regulation and high valuation might clip their wings in the short-term.

The next taper should not scare you, for the overall forces are heavily inclined toward hyper-growth.

360 Advisory – Markets