Christophe Ollari is a market strategist with range, combined with an ability to distill a wide array of market variables into a practical narrative. In a piece today entitled ”Boy Crying Wolf”’ Ollari revisits a note published back in late January where he discussed the ”serious developments in the Chinese swine flu crisis occurring in the central Chinese city of Wuhan.” As markets continued on their ebullient path in early 2020, Ollari wrote on January 21: ”Is this new pandemic episode the potential trigger? Again, I don’t know yet. But what I know is the following: markets’ reversals always come from the sudden realisation that everything was far too perfect to be true….”. This is a question that is relevant again, Ollari argues, as the risk rally continues, street consensus gets bullish and markets get swept up in the optimism of economies around the world opening up again. Of course bullish skeptics would tell Ollari that the backdrop of market positioning today is a world apart from that of early January, plus, investors now have Central Banks to step into the breach. Ollari gets that, up to a point, as he reels off an array of indicators, some of which show that many things are still as they were pre COVID. He cites examples such as the narrow breadth of the equity rally, a bullish technical set up on the Russell 2000 when the fact, as this chart shows, around 1/3rd of all US small cap companies were already unprofitable before the virus outbreak. He also highlights an interesting chart, courtesy of Credit Suisse Prime Services, that shows a sharp rise equity positioning.
The reason Ollari raises these data points is the same reason he highlighted them back in January; another mis-priced, and under-estimated, ticking bomb involving China. It’s a re-ignition of the fundamental war between the Incumbent Empire (the US) and the Rising Force (China). The key takeaway from the note is that sure, fighting the Central banks’ liquidity has been and still is a losing strategy. This cannot be denied, but there is little that central banks can do in front of a brutal re-ignition of the conflict between the US/DM economies and China at a time when the world economy is in limbo. While the trade war was the fight of the US against China, and against most of its trading partners, this time, there is an unified front against Beijing, Ollari concludes. This is likely to mean that at some stage, bad news will become what is is supposed to be: bad news, Ollari writes. (This is opposed to when bad news is seen as good news by the market; the best illustration of that being (looking through the abyss as Ollari describes it) is that over the past 6 Thursdays, initial claims came on average at 5 million and the SP500 rallied 4 Thursdays out of 6, with an average daily performance of + 1.5%. Ollari also comments on what is happening in Europe in relation to a unified policy on an EU-wide bailout package, in what he describes as ”an utter mess.” Like most things to do with the EU however, that catalyst may take sometime to evolve.