Central Banks are losing control of the cycle

Local market had a strong positive day on the back of US presidential election being called to Democrats. The markets are pricing in all the positives and ignoring all the negatives but the economic reality of the pandemic cant be ignored for long. The USD is breaking down while inflation and bond yields are breaking higher. Tariff removal is another positive being priced in as geopolitics is expected to get rational. Markets are assuming that Senate control remaining with Republicans will remove the regulatory and tax risks while pandemic hits record levels and stimulus expected to get watered down by Senate. The risk is most of these policies were enacted by executive orders and they are likely to be reversed by executive orders as well. Pandemic problems are growing at dramatic rate in the US and the new leadership can only watch it grow over the next 2 months unabatedly. The stimulus can’t be done via executive order and that will be downgraded via a deal. Markets are also assuming that the current administration goes quietly while historical trend suggests otherwise. USD decline has reached another level as it looks to break to new lows that we have not seen since April 2018. US 30 year bond yields are back above inflation as falling USD and weak capex drive up costs. Market pundits are arguing investors should go back to the same thematic of multiple expansion driving tech and health care. Since that is the dominant trade, the risk is the crowded trade unwinds with the bond market!!!

US market performance post election shows the best bounce in 40 years while market multiples are at 40 year high, bond yields are near 40 year lows, central bank stimulus at historical high and economic recovery hitting another wave of Covid 19 pandemic wave. Not sure the optimism will survive the economic reality facing US!!!

Friday overnight the US market was mainly flat and finished down 70 after spending most of the day in the negative territory...down 200 at worst. Election result was dragging on while pandemic new case numbers hit over 120k overnight. As we said from the start, election will be close and will take a few days and then legal challenges and fraud claims. It’s pretty playing out as expected. Biden was ahead in enough places with enough margin that betting agencies are paying out. Senate likely to remain long shot for Democrats as 2 seats go for run off elections in January. Russell was the worst while NASDAQ the best. Main moves were...bonds, oil and US$ lower whiles gold and bitcoin higher...looks like the main trend is taking over. Global fundies could be underperforming invested mainly in the US when the currency war goes against them. Macro trade in asset allocation seems to be fading with economic and pandemic data.

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

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