Global Financial Markets: Two-way traffic
The main story is, of course, the battle over Big Tech stocks, which is starting to look more and more like the dot.com cycle. Snowflake’s IPO may have been a stunning success but the Company had better deliver growth fast as it will be re-rated sooner or later, just as even the market leaders are currently experiencing. Others offering only loss-making and cash-burning will simply wither. This is very bad news for Robinhooders, who will find that call options can easily become worthless even if the underlying stocks are solid enough. It is also bad news for FOMO-driven investors and even passive investors (especially in US indices). However, the momentum folks will not give up easily and this should still provide a floor, or perhaps a series of lower floors, for the equity markets in the US, China, India and South Korea, which have both plenty of tech stocks and eager punters.
Meanwhile, with so much money sloshing around, investment banks need to sell stocks and institutional investors need to buy something, attention is switching to other growth stories, albeit less glamorous than those in Big Tech. Favourite places to look are cyclical sectors, small caps and some Emerging Markets. The main thing is for a stock is once it starts going up that it keeps on going so that the momentum folks are tempted here too but, if not, then the stock has less far to fall than Big Tech. This is a different form of stock-picking from the more traditional value-investing but even though it does invove some discrimination, it is hardly a recipe for ever-higher equity prices. If anything, it should hasten the time when market sentiment and fundamentals start to coincide, as they seem to be doing in Europe, the UK and some Emerging Markets.
There is also two-way traffic in bond markets. Sovereign yields, after attempting to move higher in August (and May before that), are drifting lower again as central banks signal lower official rates indefinitely. However, some of the more voracious borrowing governments, notably the US, UK and China, are meeting some resistance on the pricing of longer-dates. In contrast, Italy is finding demand because all the other large European issuers offer negative yields. With many borrowers having filled their boots at bargain prices in both bonds and bank loans, longer-dated corporate yields are also coming under increasing pressure as creditworthiness comes back in vogue (well almost!).
The FX market is always awash with two-way flows. Sterling has started to claw back some of its most recent Brexit-related losses for no obvious reason other than being somewhat oversold. In contrast, the dollar’s recovery in the previous week went into modest reverse, especially against an unlikely mix of the yen, renminbi and less major Asian currencies. This will not be well received by any of those governments except perhaps China’s, which seems keener on attracting foreign inward investment and discouraging outward capital flows.
All in all, the reflation trade is not making much headway. Even the sharp rise in Oil is related to supply cut-backs rather than a revival in global demand. The major central banks in their recent policy meetings have all concluded that inflation is still uncomfortably subdued (India is a stand-out exception) and seem rightly unimpressed by better but not yet solid recent economic data. Big shadows remain over Employment as job support and benefit schemes are rejigged or phased out. GDP forecasts are being upgraded but COVID-19 is still far from tamed even if some investors prefer to ignore the damage it is wreaking. In fact, there seem to be more worries about trade wars and a disputed US election (US investors would preferTrump to win but are relaxed about Biden, as long as there is no Democrat clean sweep). Nevertheless, some investors sulked after the Fed failed to offer yet more tangible largesse last week.
More two-way traffic ahead!