Global Financial Markets: Anything Goes!
Figure 1 What matters now
I learned to dance the Quickstep to Cole Porter’s mischievous ‘Anything goes’, which was the title song to his 1934 musical of the changing fortunes of a Wall street broker and his friends. It somehow came to mind last week as markets seemed to be dancing various quicksteps of their own.
A week ago I suggested that the US Election was not the most important swing factor in markets and so it has proved so far. Since then US equity markets have shown nothing else-not COVID-19, not delayed or curtailed fiscal stimulus, not President Xi’s hegemonic tendencies-seems to faze them. It is possible to rationalize to some extent: some form of fiscal stimulus is inevitable, a Republican Senate will restrain President Biden and the Democrat House on tax and spending, the US Labour Market data is improving, US PMI numbers are stay firm, Healthcare will continue to prosper while the Democrats may ‘owe’ Big Tech. However, more likely explanations are (1) after a rough two weeks both amateur and professional traders were up for another tilt higher and (2) there is so much liquidity sloshing around and more promised from central bankers (Figure 1)that even institutional investors can be forgiven for seeing any correction as a new opportunity. Similar thoughts seem to have enthused investors in equity markets elsewhere (the benchmark Nikkei 225 hit a 30 year high) although the last-minute pulling of the ANT IPO seems to have held back some Asian markets. However, Figure 2 shows the S & P 500 to be at ‘yet another make or break moment’ in the words of Callum Thomas, which promises an interesting run-up to Thanksgiving and year end.
Figure 2 The charts say yes….er…… and no! Source: @Callum_Thomas @topdowncharts
In contrast, US fixed interest investors did seem to react to the Election by foreseeing a cap on UST yields thanks to a Republican Senate’s limiting the flood of new issues and the Fed’s feeling more monetary stimulus would be needed after all. This provoked a new rush for anything that looked like offering a return before it is too late: Investment Grade and High Yield, corporate credit and many Emerging Market issues (because or despite their not being denominated in dollars). 10-year Italian BTPs are now yielding only 9bps: hurray while stocks last! Not in high demand last week were gilts despite the new ‘collaboration’ between the Bank of England and the Treasury. The ‘Od Lady of Threadneedle Street’ will increase its holding of gilts to £875bn, which is a big proportion even of a rapidly rising total. Former Bank of England Governor used to speak of the ‘kindness of strangers’ in respect of foreign holdings of UK assets but has to question whether the Bank will ever be unkind enough to sell some of its gilts or not replace any when they mature. We may not be talking yet of a Tory Government adopting Modern Monetary Theory but this collaboration looks like direct monetary financing, which is almost certainly necessary, but by the backdoor.
Figure 3 The kindness not of strangers but a certain ‘old lady‘
There is no doubt that the dollar had a poor week. Figure 4 is especially interesting in showing that (1) the yen did not out-perform the euro (the main trade vs. the dollar) reinforcing the speculative mood (2) the pound’s out-performing the euro is also speculative on the basis that a Brexit deal is imminent and (3) the continuing strong run of the renminbi (+5.1% year to date) indicates the Chinese authorities new preference for inward investment over exports. Other currencies fared even better led by a heady mix of the AUD, CAD, BRL, ZAR and MXN (all +2% or more) suggesting high hopes for the global economy but these might be said to be ‘undermined’ by the surge in Gold and Bitcoin. That was last week and after all…..anything goes!
Figure 4 Reports of the dollar’s death have been greatly exaggerated
With COVID-19 rampaging in the White House itself and President-Elect Biden setting up his own team of experts, the pressure will be on Mr Trump to come up with some fresh measures. New cases in the US are running at over 100,000 per day, hospitalisations at over 50.000 and deaths at over 1000 (closing on 250,000 since the pandemic broke). Can investors really keep dancing the quickstep?
Figure 5 Meanwhile in Europe………….
This report is compiled from sources Argyll Europe Ltd (Argyll) believes to have been reliable but it may not be complete or accurate on any particular subject. All opinions, estimates and analyses are or were those of Argyll at the date of issue and are subject to change without notice. Accordingly, none of Argyll, any one or more of its directors, employees and or affiliates makes any representation or warranty on any subject discussed in the report: nor do they accept responsibility or liability for any claim, loss, damage, expense or cost arising from reliance upon its contents. Argyll considers that this report falls outside the scope of the Financial Services and Markets Act 2000.