The blue wave will rock your world

The local market delivered a positive day on bond yields coming back and the short squeeze in the Tech sector. Turnover remains weak and global investors remain key to the market. The US 10-year bond yield ran above 1.18% in the last 48 hours, before sliding down to 1.07% and then recovering to 1.10% on hopes around the Biden camp's stimulus upgrade. 

Inflation data in the US overnight was solid as expected, without shooting the lights out. But we always expected that, as the boost is coming in the next few months. Biden’s new stimulus package upgrade may deliver another boost to bond yields tonight. 

The growth-to-value rotation due to the reflation trade has built a lot of shorts in the Tech sector. The pullback in yields overnight had the short squeeze effect, popping share prices in a low turnover day. The pullback in yields allowed the growth and yield sectors to outperform and the heavy lifting was done by financials and health care. 

Overall, the pandemic continues to bite the global recovery. Europe is looking like most major economies in lockdown or restrictions for Q1, while Asian countries are moving into gradual lockdown in some regions with Japan leading the problem. Even China is locking down regions outside Beijing. 

The US has realised it has a few variants of its own, while January is setting up as the deadliest yet. The equity market risk premium is already down to the DotCom era level, and any further growth downgrades and bond yield rises will only make it worse.

The rumour mill is running hot ahead of tonight's unveiling of the Biden camp pandemic stimulus package, which could be nearer US$2 trilliong than the expected US$1 trillion. 

The US economy is a pure stimulus junkie now. One big shot isn’t going to change the dynamics. It will require more and probably similar shot every quarter. 

It makes sense to go down the path of money printing and tax reform to redistribute wealth. Inequality has been built over 3-4 decades and the assets have been collected over that period. Money printing and tax reform will devalue USD, drive up inflation and bring down asset prices. US inequality will dramatically improve but that will shake the existing equilibrium. Asset prices are pricing in almost no inflation while investors are expecting a complete recovery. Bitcoin is a classic example conflicting nature of investing created by the artificially deflated cost of borrowing beyond economic cycles. 

You can fudge the cycle for a period of time but the cycle eventually catches up and it can be violent.

US market major indices offer unique exposures and relative performances offer unique insight. NASDAQ is the global growth beast with Tech and Health Care dominated while RUSSELL is the domestic facing with Financials dominated. S&P 500 is considered the most standardized and most balanced exposure for US markets. 

The RUSSELL has outperformed the S&P 500 by more than 15% only four times since the 1980s, while NASDAQ outperforming S&P 500 by more than 25%. We are currently in one of those four times, while the prior three ended up a painful experience for investors. 

All three have the same pattern: the NASDAQ runs first and then the RUSSELL. Then NASDAQ rolls over and so does RUSSELL. 

We currently have a far more mature global economy and corporates than we did in the previous cycles, and with far smaller buffers. 

The blue wave is pitching more main street than wall street. For years we have had markets do well, while the economy struggled for most. 

Are we turning that cycle? 
Are we going to burn asset prices to raise the bar for most? 
Have we matured enough as a society to do that, or will self-interest and greed take over? 
We are going to find out the answers to these questions soon enough. Buckle up!

The US market was largely flat at the last close, with NASDAQ and S&P slightly positive while the DOW and Russell were slightly negative. 

Inflation data overnight was recovering as expected, but the market was worried it might shoot up. I suspect that will play out in months to come unless we have another lockdown like last year. 

Bond yields pulled back to 1.09% after hitting 1.18% in the last 24 hours. USD was slightly higher with Gold while the rest of the commodities were choppy. 

Utilities and Property were the best performers, while Tech was doing the heavy lifting.

In geopolitics, the US is moving towards another impeachment and that will be another first for a superpower in decline. 

Almost all major economies in Europe are in some form of lockdown and expected to extend it for a few months. Moderna CEO said to learn to live with Covid forever. The vaccine won't have an effect till Q2/Q3 – assuming no side-effects or logistic problems.

In response to the above, investors should remain nimble, contrarian and cautiously pragmatic in the face of elevated global macro risks. 

Buckle up...it’s going to get bumpy.

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