In hisDaily Market Notes report to investors, while commenting on the strong Chinese yuan, Louis Navellier wrote:
Q1 2021 hedge fund letters, conferences and more
Realignment Buying
Some international growthstocks are still benefitting from the annual MSCI global index realignment that occurred at the end of May. I also expect June to be an exceptional month due to the annual Russell index realignment. On June 4th, 11th, and 18th, Russell will be announcing its preliminary changes to its Russell 2000 and 3000 indices, with the final change being made on June 25th. This essentially means there will be wave after wave of relentless institutional buying pressure to look forward to in June as growthstocks are added to Russell indices, which are well respected and utilized around the world.
The Reddit crowd resurfaced this week and squeezed short sellers in AMC Entertainment and other “meme” stocks. These dramatic short squeezes just demonstrate how illiquid the stock market is and how Citadel’s algorithms cannot handle any significant surge in trading volume. Naturally, this bodes well for this month’s annual Russell index realignment, since itshould cause trading volume to rise for many of ourgrowthstocks.
A Strong Chinese Yuan
China’s official purchasing managers index slowed a bit to 51 in May, down from 51.1 in April. Some Chinese manufacturers have a unique way of dealing with surging raw material prices, namely refusing to accept new orders and considering shutting down operations. According to The Wall Street Journal, the hope among many Chinese manufacturers is that if they delay orders or slow production, they will be able to ride out the present period without major losses until commodity prices normalize or global demand ebbs. Naturally, this is a dangerous strategy, since major customers can look for other suppliers, which will like help boost business in Indonesia, Malaysia, South Korean and Vietnam.
A strong Chinese yuan is also starting to impact China’s competitiveness. ThePeople’s Bank of China is now forcing Chinese banks to boost their level of foreign currency reserves from 5% to 7% effective on June 15th, which is the first reserve hike since 2007. In the past year through May, the Chinese yuan has risen approximately 13% against the U.S. dollar. Right now there is no threat that China will devalue yuan, but it hopes by boosting the reserves of foreign currencies that the yuan will naturally weaken relative to its major trading partners.
Due to ongoing supply chain bottlenecks and surging global demand, inflation is now a global problem. The Organization for Economic Cooperation & Development on Wednesday announced that consumer prices in its 36 countries rose at an annual pace of 3.3% in April, which is the largest annual increase since October 2008. The Group of 20 (G20) countries, inflation is even hotter and running at a 3.8% annual pace through April, up from a 3.1% annual pace in March.
Negative Interest Rates
It will be interesting how the countries that are practicing Modern Monetary Theory (MMT) and have negative interest rates, which is unlimited money pumping, will respond to rising inflation. Speaking of MMT, I asked my favorite economist, Ed Yardeni, on Tuesday about when the U.S. will follow Europe and Japan and implement MMT. Ed Yardeni showed me a chart that the U.S. effectively implemented MMT when the pandemic started. As a result, interest rates are expected to remain low for the foreseeable future.
The Institute of Supply Management (ISM) on Tuesday announced that its manufacturing index rose to 61.2 in May, up from 60.7 in April. Interestingly, the production component declined to 58.5 in May (down from 62.5 in April), while the new orders component improved to 67.6 in May (up from 64.3 in April). Clearly, the production bottlenecks persist, so new orders are pilling up due to ongoing supply shortages. Overall, the ISM manufacturing report was positive a bolds well the upcoming months, due to new orders rising.
ISM on Wednesday announced that its non-manufacturing, service index slipped to 62.7 in May, down from an all-time high of 63.7 in April. Since any reading over 50 signals an expansion, the May reading is very strong.
The Fed’s Beige Book survey was released Wednesday in preparation for its next Federal Open Market Committee (FOMC) meeting. The survey noted that economic growth increased at a “moderate pace” and that vaccination rates as well as states lifting restrictions helped to spur more economic growth. More importantly, the Beige Book survey cited brewing inflation from wage pressure as well as higher prices for goods.
I am happy that the Beige Book survey recognized what is obvious to all market observers and now expect a powerful FOMC statement in the upcoming weeks. The only lingering issue is to be addressed is will the FOMC statement discuss “tapering” and reducing their quantitative easing in the upcoming months. I should add that the Atlanta Fed revised its second quarter GDP estimate up to a 10.3% annual pace, up from a 9.3% annual pace previously estimated. The Atlanta Fed will revise its GDP estimate next Monday after Friday’s payroll and durable goods reports.
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