Traditionally, we start each day reading our virtual newspaper… seeing what’s going on in the world, what the financial talking heads are focused on. This week, however, is different. There are the usual U.S. stock market concerns — the delta variant, issues in China, etc. But this news week carries something extra…
Like many of you, we’re following the tragedy happening in Afghanistan, and we can’t talk about this week’s news and markets without that. So let’s get underway.
We have a mighty respect for the concept of a team.
And in our estimation, there is no better TEAM in the world than the United States military.
Given how hard it’s worked for two full decades, it is with heavy hearts that we watch these events unfold in Afghanistan.
As part of that coverage, we’ve heard several pundits dismiss longer-term effects as inconsequential.
We disagree.
Its location alone — occupying the high ground between China, Iran, Russia and Pakistan — provided us a strategic base of operations to keep tabs on their military actions.
Source: Google Maps
Other than India, there remains no friendly airspace in the entire region through which U.S. military teams can conduct drone surveillance. And calling in that favor would rankle longstanding Indian border tensions with both Pakistan and China.
As a result, there will be many second- and third-order effects that will require close attention and deliberate study over the coming months.
But for now… All we can do is wait, watch and hope for the safety of our friends and allies there.
The U.S. Stock Market Concerns For the Rest of August 2021
Another stock market concern for the rest of August 2021 that’s kind of getting buried — and justifiably so — is the continuing fear of the delta variant. There’s a reasonable concern that COVID-19 cases could have a major impact.
But concerns are overblown when it comes to the U.S. population.
Many are afraid that another lockdown may be headed our way, and the media is living off fears the delta variant is going to make the pandemic worse than it ever was.
But as I’ve said before, the delta variant is the most mild strain of COVID-19.
Source: Bloomberg
The above chart lists the only states where COVID-19 conditions are now worse than prior outbreaks — it’s all states in the South and, randomly, Oregon.
Source: Bloomberg
This map is new cases. As you can see, most of the new cases are aligned with the first one. Southern states — and Oregon — are where the biggest increases are. And guess what? The most prominent anti-vaxx voices are from southern states.
As I’ve also said before, it’s almost like vaccines work or something…
But the good news is this spike in cases is leading to an increase in vaccination rates!
Source: Bloomberg
To summarize: the areas most affected by COVID-19 at the moment are already seeing an uptick in vaccination rates. On top of that, we will likely have 5 to 11 year olds eligible for vaccines in September, which is a huge vector for the delta variant. PLUS, a delta booster is likely to be added into the mix.
So I don’t think it’s as big of an issue for the U.S. as one would think, but that doesn’t mean it’s not a U.S. stock market concern for August 2021.
The economic risk to the Asia-Pacific region from the virus is much greater than in the United States. That also includes China, however, and it is our largest trade partner.
Which nicely leads us into the next concern in question…
China Retail Sales, Industrial Production Slow
The financial talking heads are all about the clickbait headlines and fear. So by pumping up nothing but Afghanistan and the delta variant, they’re simply doing their jobs.
So let’s do ours…
When financial news is too focused on one topic, our practice requires us to somewhat disengage from that newsflow and assess where best to refocus our collective attention.
For this process, it is often best to start at the beginning of the supply chain and work one’s way forward.
For most products, that means starting with China.
In general, China will make new orders of raw materials, manufacture those raw materials into finished or semi-finished goods, and then sell most of those goods into export markets with the remainder available to domestic consumers.
As such, it’s an important component of our practice to follow that data trail — from new orders to industrial production to exports and retail sales.
Two of those data points — industrial production and retail sales — were released Sunday. The results? A concern for the U.S. stock market this August.
Source: Bloomberg
Both indices missed projections by a wide margin, which confirms that China’s economy is slowing.
That was the thesis when we placed it on the cut list to begin with, and that’s the call we’re sticking with now.
As I noted, the United States is China’s biggest trade partner — by a long shot. So if it has problems manufacturing, we have problems importing.
And with U.S. inventories of darn near every consumer product at or near all-time lows, further delays could certainly keep inflationary pressures elevated.
As such, expect some volatility this week — thanks to these U.S. stock market concerns. Especially with the monthly options expiry (there’s been an options freakout every month this year) coming up on Friday.
The game plan for us will be to try and pick off one of our longs toward the end of the week as they approach their bottom cut.
All the best,
Matt Warder
P.S. WealthPress Senior Strategist and former multi-million dollar hedge fund manager Roger Scott has finally broken his silence on his breakthrough discovery…
One that could save traders hours of research.
It all revolves around what he calls a “Sniper Line.”
Once a stock crosses a sniper line, investors can place a quick trade, check back in a handful of days…
