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Editor's Note: Hamish Risk | October 15, 2020
After months of dealing with the effects of the greatest health emergency the modern world has ever seen, investors’ thoughts are now squarely focussed on the US presidential elections. The two, of course, are inextricably linked, and in today’s Macro Briefing, Ollari Consulting explains why options markets are going to drive volatility until the vote, and why the prospects for stocks are increasingly precarious until Washington can hammer out a fresh stimulus deal. Meanwhile, The Macro Tourist sets out why policymakers’ new focus means the 60/40 portfolio –aka “long spooz and blues”- has hit its expiration date, CPM Group outlines what the US election means for precious metals, and Eurasia Group reveals why Europe is likely to be the biggest loser if Donald Trump gets re-elected. Away from the vote, Goldman Sachs explains why it believes fears of a no-deal Brexit are overdone.
Equities equity vol Ollari Consulting
1. Equities; Up and downWith three weeks to go the Presidential election, equity investors are facing a volatile journey according to Christophe Ollari at Ollari Consulting. Notwithstanding the continued strength in Chinese stocks, he believes developed market equities are about to fall apart given there is no sign of agreement over further stimulus packages in Washington, while increasing lockdowns in Europe and worries over Brexit are also weighing on sentiment. Admittedly, Ollari says these headwinds are nothing new, but they have been given added impetus by this week’s rally in large tech, which rather than being a symbol that all was right with the world, is a reminder of the influence that the options market can have on spot stocks. The gamma dynamic, which as we pointed out yesterday, many believe was behind the spike higher in prices, can after all work both up and down, says Ollari, and after this week’s price action, positioning suggests the latter is now more likely.
Asset allocation Equities Rates The macro tourist
2. Spooz and blues – the final hurrah of Wall Street over Main StreetKevin Muir, from the “The Macro Tourist”, says he has long been a fan of Jefferies’ market strategist David Zervos, who for years has championed his “long spooz and blues” idea, a strategy in which investors go long stocks (by buying the “spooz” contract – the S&P 500 futures) while also being long “blues”, the fourth-year pack of eurodollar futures. In essence, he explains, the “blues” are what the market expects three-month LIBOR will be trading at in four-year’s time, and what Zervos is doing with his long “spooz and blues” strategy is combining a position in the S&P 500 with what has been a negatively correlated long fixed income position. Not only does the “long blues” offer negative correlation to a risk assets, says Muir, but over the past decade it has been a steady winner as interest rates have trended lower. Indeed, he says the decade following the Great Financial Crisis was the golden era for the “spooz and blues” strategy, as it exhibited unbelievable low-volatility combined with outstanding returns, and represented the final hurrah of Wall-Street-over-Main-Street as central bankers took monetary policy to extremes. Now, however, Muir believes the strategy should be shelved as Main Street garners a bigger slice of policymakers’ pie, with labour gaining a larger share of the economy than capital. This, he says, is hardly going to be beneficial for equities in the long run, especially in the event of a Biden presidency. Added to that, the prospect of inflation also weighs against the strategy, says Muir, making the ballast of a fixed income position in a portfolio of risky assets more of an anchor. “Spooz and blues” was a terrific trade, but its time is up, he says, and where it once produced nice, steady non-volatile positive returns, it will increasingly result in violent uneven poor performance. Perhaps, in the final analysis, Muir’s note is another way of saying the 60/40 portfolio has hit its expiration.
precious metals US presidential elections CPM Group
3. US presidential election impact on precious metalsCPM Group is a commodities research, consulting, financial advisory and commodities management firm, and one of the foremost leading authorities on the precious metals market. CPM’s Rohit Savant has issued a note outlining the potential effects of the US election on precious metals, highlighting how the two candidates’ different approaches to fiscal policy, global trade, regulation and climate change are likely to affect prices. He says in the short term, markets are likely to respond based on the policies promised by the winning candidate, with little immediate consideration for how many of those policies will actually and eventually pass. In the short term, a Biden presidency is likely to be more positive for gold and silver prices than a Trump regime, according to Savant, given that the Democrats’ fiscal policy and regulatory approach is likely to be bad news for the equity markets. The opposite outcome can be expected under a Trump regime, he says, with further tax cuts and looser regulations boosting risk assets and hurting safe havens. Savant says, however, that the long-term outlook for safe havens is expected to be more positive under Trump than under Biden. Deficit spending and light regulations, which may be beneficial in the short run, could turn up problems for the long-run sustainability of economic growth, he explains, and this, coupled with a more nationalist approach, would weigh on global economic growth and bode well for gold and silver. While the prospects for gold and silver are better under Trump, adds Savant, in the long-term they are expected to be fairly healthy under a Biden presidency as well, with an expansion in government spending, which could aid inflation, and a tough stance toward China which could also be supportive factors for precious metals.
European Union US Elections Eurasia Group
4. Europe would be biggest loser in Trump’s second termPresident Trump would view re-election as an affirmation of his “America First” foreign policy and a mandate to continue it for four more years according to Henry Rome at Eurasia Group. In a second term, he says Trump’s core approach would remain the same: highly transactional, tactically unpredictable, and frequently erratic. Rome says, however, unlike in his first term, many establishment foreign policy hands—the “adults in the room”—would stay away, depriving a second term of internal constraints. Europe, he says, would face significant pressure, as Trump would likely hollow out NATO even if he does not withdraw, while his disruptive approach to trade and contempt for transatlantic ties would exacerbate economic pressure on the EU, with the threat of auto tariffs—which could spark a $100 billion trade war—continuing to hang over the relationship. According to recent polling from the like’s of Nate Silver of FiveThirtyEight, Trump has a 14% chance of victory (this may have changed in recent days) and in their recent podcast here, Silver and his colleagues highlight what a possible narrative would have to look like for Trump to be re-elected.
Brexit Goldman Sachs
5. Brexit – this too shall passNeither the UK Prime Minister’s 15 October deadline nor the European Commission’s 31 October deadline constitutes a hard stop on Brexit negotiations, says Adrian Paul at Goldman Sachs. He says further movement on matters of substance will be required before a deal is done, and in particular, the UK will need to acquiesce to a state aid regime that does not offer Downing Street unfettered autonomy. For its part, says Paul, the EU will need to settle for more restricted access to fishing stocks than currently permitted. A deal will also require the successful execution of a delicate piece of political choreography, he says, given the European Parliament is unlikely to ratify a free trade agreement as long as the most contentious clauses of the Internal Market Bill stand on the cusp of UK legislation. By the same token, says Paul, the UK government is unlikely to drop the Internal Market Bill as long as it chafes at the stringency of the level playing field provisions embedded within the free trade agreement. He thinks the perceived probability of “no deal” will persist through the course of October, but his core view remains that a “thin” zero-tariff/zero-quota trade agreement will likely be struck by early November, and subsequently ratified by the end of the year. From both a substantive and a political perspective, Paul says, the risks around that base case are skewed towards later resolution. It is the end of the transition period on 31 December that constitutes the hard stop on Brexit negotiations, he adds, even if a deal by then only represents the end of the beginning of post-Brexit relations.