Blue wave is going to hit where it really hurts...right in the market darlings!

Local market had another negative day on low turnover as global investors continued to sell into AUDUSD weakness as reflation trade keeps pushing bond yields higher. US 10 year bond yield is now 1.15% and remains above Aussie 10 year bond yield. Banks and Insurance sector were the better sectors and delivered nearly 20 point upside for a market that was falling all day. Tech, Health Care and Property sectors were the worst and that’s classic sell sectors with rising bond yields.

US 30 year bond yield is delivering better yield that S&P 500 and above inflation. Reflation genie is out of the bottle and the economy need more stimulus. More and more stimulus means higher taxes, weaker USD, even higher inflation and bond yields. Even if you ignore the regulatory risks faced by Techs and Health Care sector in the US, the reflation cycle will continue to weigh on multiples. Techs will continue to take a bigger part of the economic pie but they will not attract a bigger multiple than we have already seen. Given the substantial multiple expansion experienced in the US Tech/Health sectors in recent years as Central Banks decimated global interest rates, multiples coming back to new reflationary normality would require substantial earnings growth upgrades in a pandemic recession with higher taxes and higher regulation. Logically it is hard to see that over the next few years as Blue Wave targets main street over walls street. We have been warning about the growth to value rotation for nearly 6 months and it is now becoming blatantly obvious. Ignoring cycles have not been a good strategy!

US market last close > US market was down as bond yields keep climbing on reflation. US Fed commentary continues to point to reflation and rates going up faster than expected. After months of saying rates are not going up for 3-4 years, the recent chatter points to late 2022. USD bounced and that weighed on commodities. NASDAQ leads the falls with Russell holding up better in a weak day. Growth to value rotation playing out gradually. US 10 year bond yield hits 1.14 while 30 year hits 1.90. These are not good for equity markets and definitely not good for trading at 20 year high multiples. Pandemic waves are hitting all parts of the world including China while new variants are popping up as well with Japan the latest. US election unrest to play out for another two weeks while economy fades.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

Not already a Livewire member?

Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.