Austerity, It's So 1990's
Rotation Trade Investors might not need Claritin but could sure use clarity… on the Big 3 of fiscal stimulus, US electoral outcomes, and Covid vaccines. Absence of such = wishy-washy trading. We expect such clarity in the coming 3-6 weeks & note only 12 trading days until the US elections...use weakness to add to risk assets.
Austerity - it's so 1990s… even the IMF now says Govts should spend more money; the problem is fiscal policy requires political compromise and that is lacking (on both sides of the Atlantic).
DC fiscal follies continue; the key point is that fiscal stimulus is a when not if question. Blue Wave = big fiscal, Biden Presidency with Republican Senate = much less fiscal (note Senate Republicans already in obstruction mode with their own President), Trump re-election & Democratic House = medium stimulus given Senate Rep.
There will be stimulus; there will also be US elections and an outcome, soon. Early voting is up 500% vs 2016 & favors Democrats. Expect an Election Night outcome (latest next day) as a Biden landslide remains the most likely outcome (Predictit 58% Blue Wave). Florida remains key as does Senate control. The authoritative Cook Political Report this week declared Democrats to be “the clear favorite to flip control of the Senate”.
Speed bumps pocketed the vaccine highway as several trials announced voluntary and completely normal pauses, resulting in some risk asset indigestion. Regardless, both Pfizer & Moderna’s Phase 3 trial results are expected in the next month or so. That’s Covid speed of science.
Rising case counts, especially in Europe, remain a worry, with European equity selling off as Covid control measures dampen the re-opening trade. Note however that EU hospitalizations and death rates are down sharply from Spring levels (WHO reports death rates 5x lower) and real-time mobility data is nowhere near as negative as the headlines.
Yet it's clear that Europe, with its cyclical equity bias, needs clarity on the vaccine & perhaps US stimulus, to move appreciably higher. Could European equity turn out to be the biggest beneficiary of a US Blue Wave? Keep in mind that vaccine/rising rates = Tech “kryptonite”.
Tech btw, is also struggling to get above its early Sept highs (QQQs), and with regulators on both sides of the Atlantic looking to slow the tech train down, it's one more wrinkle in the Tech forever story. US Regulatory pressure is likely regardless of who wins in November.
Technical action remains important in range trading markets. This week’s lack of equity follow thru on the back of the best week for stocks in three months (breadth thrusts, 15% of SPY hit new 52 week highs Friday) clarifies that a vaccine or stimulus will be needed to further jumpstart what has been a stealth Rotation Trade.
Said Rotation Trade pressed up against some limits recently and was rejected. Rates remain the fulcrum of the Rotation Trade and the Financials/Tech split. The breakdown in long-dated UST (TLT) was arrested at 200d support while the breakout of US Financials (XLF) was halted, though not reversed after good results were poorly received. Liked yesterday’s action though.
In Europe, BUND yields have gone further negative while broad stocks broke below support. 2 points: US banks have ROE of 15-17% and sell at barely 1xBV, EU bank equity trades much worse than bank debt.
Bottom Line: we remain of the view that 2021 will be a global economic BOOM year (10/2 Musings) supported by robust fiscal stimulus, record global liquidity, and underpinned by a global health outlook bolstered by therapeutics and vaccine(s). Both US (housing boom) and China (DCS strategy) should drive an inflation scare as consumption demand outpaces supply.
As such risk asset weakness should be bought. Risk reward is attractive given the degree of hedging in place which limits the downside coupled with forthcoming clarity on the big 3 issues.
Areas of equity focus remain: US Cyclicals/Value, SC, non-US DM equity, EU banks, East Asian Tech stack, China. In FI, we continue to favor: US HY (IG exposed to rising rates given duration drift & skinny coupon), US Preferreds, EM USD debt. Fun fact: $31T in DM Sov debt offers negative real yields, incl 95% of UST bonds vs 17% of EM Sov. Commodities remain attractive including both precious and base metals/miners, clean energy & oil on weakness.
PS. Several folks have asked about last weekend’s trip to the Mtns...well, we survived the climb but almost got flooded out by a nighttime T storm - the vagaries of the markets have nothing on that of the mountains! TGIF indeed.