We had the good news about the stimulus, and now we are going to pay for it!

The local market delivered a negative day on the back of the weak US lead and solid China data. US markets were hit on weak retail data and early reporting season financial stocks were hit hard on expectations. Risk-off trade delivered USD bounce and bond yield decline. Also AUDUSD was sliding and the global investors were selling on the back of that. China GDP was solid but underlying data were patchy. 

All said and done, China remains the only major region/country to avoid a technical recession but even they are facing new waves of the pandemic. Turnover remains weak and global investors remain the main players in the market. 

In a reversal trade, recent value trades in miners and banks fell the most, while the growth exposures in tech and health care were in the positive territory. US markets major indices are running on conflicting thematics while the new administration is unlikely to waste firepower protecting Wall Street over Main Street. 

The reality is that the US earnings season needs to deliver big beats to compensate for the drop in multiples from reflation. If the outlook statements continue to underwhelm like the financials on Friday, we could be in for a rough ride. Get ready for US inauguration week. There are more Green Zones in US than in Iraq and Afghanistan put together. The new policy settings under the Biden camp will start to flow through executive orders as soon as Friday. We already had the good news about stimulus, now we are going to find out how to pay for it!

The Biden camp are trying to manage a pandemic situation out of control as seen above in the short term while medium to long term is mainly reliant on vaccine distribution and effectiveness. Biden camp are expected to release numerous executive orders straight after the inauguration to get the policy settings in line with their view while Trump camp is planning to deliver over 100 supporters with pardon on the last day. It has always been more reality TV than leadership but now even the pretence is out the door. The latest job and retail sales data shows the economic issues while handouts need to be funded through higher taxes. Expect quarterly checks to be sent out with a $1T price tag each time. There is a lot of bonds issuance coming to flood the market in a reflation environment. Bond yields are going to go higher and US Fed will be forced intervene or asset prices will be in danger territory. Expect US 10 year bond yield to be near 2% in late Q2.

China GDP was reported at 2.3% last year as the rest of the world fell into recession to contain the coronavirus pandemic. GDP grew 6.5% in the fourth quarter from a year ago but Chinese consumers remained reluctant to spend, as retail sales contracted 3.9% for the year. Retail sales for the fourth quarter rose 4.6% from a year ago. Online sales of consumer goods rose at a relatively rapid pace of 14.8% last year, the statistics bureau said, but the proportion of overall retail sales held steady at around one-fourth. China has started to take control of steel and property industry while tightening financial conditions to not let things blow out. If you have been waiting for China to implode in debt while the world loads up on debt like a drunken sailor, you may have to wait longer than you think.

US market last close > US market started negative with falling retail sales and financial results beating expectations and stayed negative all day. Early falls were more than 300 and finished down 180. Retail sales fell more than expected and previous month was downgraded as well. Job and Retail data confirms the economic recovery is in trouble and the Biden’s rescue package is more maintenance capex than growth stimulus. The economy has been the unwanted sibling compared to markets in recent years. Expect a lot more stimulus to Main Street and that will be paid by higher taxes and regulations directed at Wall Street and the top end of town. It was a classic risk off trade with Bonds and USD moving higher while Commodities and Equities fell. Aussie miners should benefit from currency protection as AUDUSD falls. RUSSELL was the most hit with NASDAQ next. As we said before, we are in the last innings of the game and that is usually flagged by NASDAQ and RUSSELL underperforming S&P. Property and Utilities were the best in sectors for risk off. We had the good news from stimulus and the bad news on taxes and regulations will come after inauguration.

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

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