5/30-year yield curve reached its steepest since February 2017 with spread pushing above 122 basis points due to combined forces of Fed interventions and government borrowing. Front end yields will likely to be at zero bound for the next 5 years, at least, based on futures pricing while prospect of more government borrowing to fight deep recession will be driving up the longer end, possibly to a high of 1.5% this year end, according to some market strategists. A bond yield spike (and price crash) would be
ultimately negative for stock market, too.

The contrast between markets and main streets is painfully stark but reality is that the gap will narrow given job losses climbing into the tens of millions, rage of George Floyd’s death and impact of Covid-19’s resurgence. High-grade bond yields are closing in on record lows while stampede back into popular corporate bond ETFs has pushed their assets to all-time highs. Darwinist regime in corporate world has loaded up debt issuance of more than US$1 trillion this year while bankruptcy filings have risen to levels not seen in many decades. Key risk is that it will become a lot more problematic should finance’s frontrunning of the  economy not be validated by strong and sustainable economic growth.

VIX is becoming quite elevated once again. If that is the case, this could imply that the recent meteoric rise in stocks may have been an atypically sharp bear market rally, instead of the start of a true, new bull market. More volatility and ranging are the easy answer. I have not seen a good turnaround among institutional investors’ sentiment on risky assets with significant political risk looming while retail traders are getting amped up since March’s low. Big money is not buoyed by the market’s bounce. The weakest economic data points in history are understandably casting an ominous shadow for the smart money at the moment. Month of September and October are infamous for featuring volatility. Is that in the cards this year? Surely the narrative of negative seasonality will get some play on the major financial news programs as we approach autumn. I am waiting all waiting for a return of fear to shakeout those weak hands as an election is just a few short months away.

The major open question is whether the recent sell-off is simply a healthy re-test of the breakout or something more sinister. While I am leaning bearish given weak technical, hoard of new traders entering the market and soft sentiments, but don't be surprised if we end up with a volatile ranging market given the strong possibility of earnings shortfalls. So far, how many more companies that provide no guidance last quarter will come out and warn, or flat out report disappointing results? If the companies themselves were unable to have visibility into how their quarter would perform, it seems highly unlikely that investors can do much better. Clearly from a risk management standpoint, a clean break above 1,554 for FBM-KLCI will probably open up further upside. I've been cautious throughout this rally!
 

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com