Market optimism ignoring economic reality

Local market had another positive day with global macro currency trade driving all sectors green. Global investors were chasing the rising AUDUSD with Energy and Banks playing into the currency/value trade. We started positive on US lead on the new vaccine update and ex Fed Chair Yellen being announced as future Treasury Secretary while intra day the Trump administration finally allowed the transition team to start moving after extensive pressure from all sides. Trump administration continues to claim that legal challenges will turn the result but all attempts so far have failed. We are only a few weeks away from individual states confirming the result and then it’s too late. Recent steps by Trump administration in the Middle East and in Asia looks like we may see geopolitical escalation in the next few weeks to lock the new administration. US pandemic management is being left uncoordinated and Thanksgiving long weekend remains a massive risk due to mass movement of people expected to speed up the spread of the virus that is already hitting record levels. We are seeing real time data in the US weakening and economic data like jobs and retail sales support that. We already know Europe recovery story is fading with lockdown. US pandemic is highly likely to drive Governors to do shadow/weak lockdowns due to political pressures and hospital capacity. Markets have priced in vaccine and election optimism but ignoring pandemic and economic reality in the short to medium term!!!

The new administration’s appointments are more likely to concentrate on the economy than the markets. That will further drive the reflation trade and style rotation from growth to value. The growth to value switch has started globally and locally. The bond market flagged is a few months ago. New US administration and vaccine hopes will add further fuel to the fire. US market outperformance is driven mainly by high growth high multiple tech sector and that ain’t sitting in a good spot for investors!!!

US market overnight were up on the last of the big three expected vaccines delivered solid result as well as Biden’s team announced ex Fed chair Janet Yellen to be Treasury Secretary. US had solid PMI data update while real-time data suggests economy is fading in November. Russell is the big mover for the day while NASDAQ is barely in positive territory. Growth to Value switch is picking up steam as bond yields rise. USD bounce hit all metals while oil was higher on opening up. Oil has bounced too hard given lockdown restrictions are in play in most northern hemisphere regions. More election legal challenges fail but still no transition. European markets were slightly negative on pandemic risk. Health Care, Property and Tech were the only negative sectors. We are now done with new big vaccine plays for a few months.

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

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