Sunset Strip - 21st October 2020

Local market was volatile but mainly flat. It struggled to follow the US bounce on stimulus hope despite the recovery in the currency. Global investors were spooked by weak job data yesterday and weak retail sales today while RBA is in line to cut rates down to 10-15 bps. The central banks around the world are fast running out of ideas and preparing to take rates to negative territory and unleash digital currency to directly stimulate the economy. Due to government and banking system problems/rorts/corruptions, the monetary policy has not solved the problem and fiscal policy is loaded with too much debt. Central Banks are going to bypass governments and banks to boost economy by direct income. Socialism may be coming sooner than most anticipate but it will be packaged as enhanced capitalism. Bit like the Coalition government running Labor policies after spending a decade bashing them for supposedly badly managing a GFC with no recession!!!

As we mentioned before, we are all following the failed model of Japan and inevitably this will create a lot of unforeseen problems. The first of that is inflation!!! Not the good inflation through wage growth but bad inflation through cost rises. Depending on what happens in the US election and the policy options taken after that, we may see the ugly head of cost inflation within months!!! White House wants a stimulus deal to boost a fading election cycle while Democrats are stalling and Republicans are scared of the mess after the election. US presidential debate tomorrow night will be another risk catalyst!!!

The Chinese Yuan is ripping higher to more than two year high against USD as Chinese economy is the only major country/region that has stable recovery while managing pandemic waves. Trade wars were supposedly easy to win and make America great again. Guess that hasn’t gone to plan according to the currency markets!!!

Overnight US market started up 350 on better stimulus sentiment but that faded though the second half of the day to finish up only 110. All the US indices were up around 0.4% while NASDAQ was the laggard up 0.3%. Bonds and US$ lower while Commodities were up... including Gold. Despite these moves and better Covid outlook, A$US$ went down...fiscal and monetary policy starting to worry investors. EU markets were lower. Pandemic waves are ripping through EU and US. We are seeing rolling restrictions coming into EU and probably see that in US after election due to politics. Next month could be key as numbers are on the run. Democrats are playing with Republicans on stimulus. They are not going to say no and they know Republicans won’t agree to $2trill+ package. They are going to keep this drama going as close as they can to the election without a deal while negotiating. Republicans seems to not have a plan B as far as policy reform limited to tax cuts and handouts. Energy was the best sector while Staples were the worst. October is living up to the volatility tag and we just hit third week. Presidential debate tomorrow night should add to the risk as markets are mainly pricing in one sided election result for democrats.

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

US heading to socialism sooner than you think while Japan and Europe are already there but in denial.

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