Markets are a hostage to Vaccine stories and Election tweets!!!

Local market had a strong lead from the US but the momentum only delivered a solid positive start that faded through the day as the election uncertainties and vaccine reality weighed on weak economic outlook in the US. Markets are struggling to justify the sky high valuation with lockdown restrictions playing out around the world. Every central bank has the same play book…debase the currency, expand the balance sheet and keep the long yields down. US and Europe have created a roadblock to global recovery via pandemic waves. The cost inflation is rising in the US with currency debasement and the bond market is reacting. Central Banks are losing control of the twists and turns in order to keep yields low for longer. US 10 year bond yields are higher than Australia. Historical trend suggests market risks are high as financial stress is building. Election may have been called in the US but the transition may not happen at all. We may be going to countless legal challenges and delay tactics before this soap opera is over. If you ever been through the US legal system, you know that everything moves slower than New York traffic. While this legal song and dance are played out, there is very little hope of a stimulus deal…even a weak one!!! The vaccine updates are many and they continue to be weak on detail while delivering good share price movements. Overnight one is no different, it is not like they do not know that you need more details but they offer enough for optimism but not enough for clarity. Everyone knew that there is about a dozen potential vaccines that will get early data in Nov and so expect more to come…hopefully more details than just pump stories!!! This does not change the fact that the best case scenario for vaccine coverage of US will be in about 6 months while the world coverage is likely to be in a year. There is a substantial economic mess to clear up ahead of that. It is positive news but that will not remove the winter hit coming to northern hemisphere after the abysmal management of the pandemic by some major economies.

The equity markets have started to make major sector switches due to the bond markets running out of steam. US 10 year bond yield is breaking multi-year down trend. Investing in a rising yield cycle has only been academic for all investors up to now. Get ready…it is about to get real!!!

Overnight the US market started up 1600 on vaccine news and election being called...but the reality of the vaccine delays watered down the bounce to 830...that’s +3%. Russell up +4.3% lead the reflation bounce with NASDAQ down -1.5%. Bonds, Gold, Copper were down while US$ was up. High growth stocks with high multiples are not supported here while cyclical growth at value is back. Sector and stock selection will be key in the next year and that will continue to change. Resources and Financials to benefit over Industrials.

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

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