Markets can't have high multiples and economic recovery too

Local market had a positive day on Iron Ore miners and global traders on currency trade. The market mainly traded with the currency through the day while the big three Iron Ore miners single handedly moved the market from being 20-30 point down to 20-30 points up. The overall market ex Iron Ore was negative to patchy like most Asian markets. Resources and Property were the only positive sectors while growth sectors like Health Care and Tech were hit the most. We continue to see big positive moves in bond yields and negative moves in USD in recent days as reflation trade with vaccine news flow. The economic data remains weak from US while the Chinese data remains robust and positive. The real time data backs the weakening US data as pandemic waves and lack of stimulus talk weighs on economic activity. Markets are ignoring the short term weakness on stimulus and vaccine hope. Investors want to keep the high multiples and endless stimulus while also wanting economic recovery. Hence the bond market is raising yields on reflation trade. US Fed to being forced to buy more bonds via QE to keep yields lower and that will further debase USD and drive high inflation. It is a trap that US Fed has got themselves into due to excessive money printing (i.e. MMT for the top end of town) without reform to drive recovery for the middle and lower class. US has not learnt from the failures of Japan and EU while markets are betting on this failed strategy being endless. Something must give and that is likely to be the US economy!

US pandemic hospitalization is nearly double the level in the previous two cycles while this time it is happening all over US. Previous cycles, they were able to rotate equipment and staff from location to location as demand rose but this time it is reaching capacity in all parts of the US. We are still to see the damage from Thanksgiving weekend travels and that may force Governors to lockdown or put substantial restrictions ahead of Christmas and New Year holidays. Irrespective of the move by state leadership, most US citizens are already preparing for lockdown as seen via real time data. Economic slowdown is clearly seen through numerous data points like jobs, retail sales, housing and auto sales. Nonfarm Payrolls on Friday night is expected to fall from above 900k in Oct to below 600k in Nov.

US market overnight eked out a slight positive on stimulus hope. Bond yields are flying and dragging USD lower and Gold higher on reflation. Russell is the best performer and NASDAQ was slightly negative. Growth to Value trade just keeps adding momentum. AUDUSD up above 74 and going higher in the medium term as USD looks coronised. Short term risk of trade likely to pop USD but medium to long term looks pretty weak. Energy and Financials were the best on value trade. Yields are moving too fast and too high for Equities. Central Banks need to enter Bonds to stabilise or reflation trade will hammer asset prices. Have you got enough Gold? It’s a value trade now.

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

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