Risk Asset Tug A War
Happy Friday,
Lots of press about horrible Q2 GDP #s, few headlines about BTE Q2 global earnings.
Neither means much - if 2020 has taught us anything it's that we must focus forward to keep up with CV19 speed and the algos. Heck, even back in the old days summer end meant focusing on the year ahead.
Dr. Fauci was quoted this week saying it's “reasonable” to expect a working vaccine by YE - that's the speed of science in the Age of Covid, augmented by Moderna & Pfizer both announcing 30k person Phase 3 trials with October review dates.
As we enter August two things come to mind - time to get ready for school (if you have kids) and poor seasonality for equities.
We noted in last week’s Musings (link) how the lines of distinction between Europe and Asia’s handling of CV19 vs the US were becoming more and more self-evident. School is one example - many European countries have schools in session now yet the US can't figure out when, how or even if schools should reopen.
On the comparative governance front, the US Senate decision to break for a long weekend while numerous CV19 benefits expire says it all - especially compared to the 27 EU Heads of State who went deep into overtime to get agreement on the Joint Recovery Fund.
JPM notes it now expects a much stronger 2021 economic recovery in Europe with a 6%+ GDP forecast vs roughly 2.5% for the US. Better governance, better growth, it's Papa Johns (no sorry) it's the EU!
FX traders have cottoned on to this with the USD having its worst month in a decade; same for fixed income traders as much of the UST curve hits new lows in yields. Maybe that's why equities don't seem to have gotten the memo.
Speaking of FI, did you know that over 85% of the global investable bond market yields less than 2% while the globe’s pile of negative yielding debt now exceeds $15T?
Earnings season has come in BTE with tech demonstrating what winning in the Age of Covid looks like. Beats are high on both sides of the Atlantic; more importantly revisions are stabilizing across 2020, 2021 and 2022. Earnings have bottomed.
Going forward the focus should be on execution - at all levels: Govt, Corporate, Society.
Asia and Europe have demonstrated that getting the public health process right leads to better economic outcomes. We expect this recognition (not yet agreed upon in the US) to manifest in stronger, more robust 2H economic recovery outside the US, reinforcing the Cyclical/Value nature of the ex US DM equity markets. Europe’s equity pullback provides a nice entry point.
Covid 19 has put global trade on its back legs, signaling the importance of domestic demand which in turn reinforces the need for robust CV19 response otherwise that service sector leverage turns on itself - this is a 2H risk in the US.
The botched nature of the US response calls into question the sustainability of its economic rebound, likely capping equity upside as the US rotation to Cyclical and Value is blunted, flattening the yield curve and pushing leadership back to an overrowned tech sector.
As we enter the worst seasonal period for equities, also one of worst for UST (and historically one of the best for the VIX, no surprise, and gold) we expect a tug of war in risk assets: on the plus side, speed of science as noted above, earnings bottom, strong likelihood of a DC deal, an ebbing of US CV19 cases, hospitalizations & deaths against an unpredictable White House & rising US political risk, chaotic school reopenings, economic disappointment & poor seasonality. Perversely, any tightening in the race for the WH is likely to be negative for risk.
We remain positively disposed to risk assets with a preference for non US DM equity, China, ex US tech, Cyclicals/Value, metals/miners & yield plays including preferreds, EM debt, TIPs & US HY.
In the very near term the USD is oversold and due for a bounce while gold is overbought - the rally in UST prices corresponds to rising US CV19 cases - as cases rollover, look for bond prices to fall & rates to back up.
TGIF!
TPW Investment Management Team