Tuesday, Nov 24Hamish Risk | November 24, 2020
It’s slowly all coming together as we prepare to run up the final straight of 2020, yet it’s still going to be treacherous, with markets operating on multiple time horizons. In the very short-term we still have a rampant virus in parts of the world, which can still do immense damage to the economy, writes Raoul Pal. Central Banks will step into the breach in the short-term, until an ex Central Banker steps into the US Treasury role Jan 20, feet hitting the ground running, as Cowen & Co highlight. In the medium-term, you have the vaccine, and renewed optimism this week that it could be more accessible and affordable for the entire world, which has the potential, from a market perspective, to fuel the reflationary trade in 2021. It’s the grind between the ”now” and the ”then” that creates the current market friction. Ned Davis Research highlights how this has manifested itself in terms of market breadth, the ”all clear” signal for the equity market to march higher. Interestingly, NDR’s indicators aren’t quite at the point where they’re ready to turn entirely technically bullish on equities – at least not yet. Then you have the longer-term trends, such as the Green Wave for instance. Take copper, which has been a classic example of a commodity that was typically a cyclical trade leveraged to global economic activity, but which now is part of a much broader secular long-term trend. Jefferies thematic research team expect the Green Wave to produce a secular bull market in copper and copper producers and miners for years to come. Pick your time horizon.
bitcoin COVID-19 QE reflationary trade Macro Insiders
1. A cold hard winter can do much harm before the spring vaccineInvestors are in for a troubling winter and a dose of reality lies ahead says Raoul Pal at Macro Insiders. Globally, the Covid-19 is getting really, really bad, he says, with cases doubling in the next eight weeks, fuelled by the holiday season. Governments, says Pal, are between a rock and a hard place, facing the prospect of either cancelling all holiday season gatherings and destroying GDP growth in the biggest sales season of the year, or letting it happen and lock down in January and February and destroying the economy. He believes governments will have to turn to fiscal stimulus in a bid to support the economy across Europe and in the US, but it is unlikely to come quick enough or large enough to save the economy, forcing central banks to return to the printing press. This according to Pal’s dire assessment will see G4 central bank balance sheets quickly hit $25 trillion as yields plummet. He urges caution in equities, and warns investors to be wary of the current reflation narrative being reversed. As Pal notes, the speculative short position in bonds is the largest in all recorded history, and if those speculators are wrong and reflation isn’t coming, there will be a blood bath as short positions get stopped out. Pal says that while gold will probably do ok, it is likely to be thrashed by the performance of bitcoin, a high conviction trade that he has held since the pandemic began, and which continues to build increasing momentum.
fiscal stimulus US Treasury Secretary appointee Cowen Research Group
2. Yellen ticks a lot of boxesJaret Seibert at Cowen Washington Research Group has issued a note setting out his views in the wake of reports that President-Elect Joe Biden is set to name former Federal Reserve chair Janet Yellen as his Treasury Secretary. He says he expects her to easily win confirmation from the Senate and that the process will take no more than a few weeks. According to Seibert, the choice of Yellen increases the prospects that the Fed will launch emergency loan facilities to boost the economy in late January, and he expects her to restart loan programmes like Main Street and the Municipal facilities to get low cost credit into the US economy. He says this could also open the door for liquidity help for housing, which Yellen should back. Seibert also notes Yellen has extensive experience working with Democratic and Republican administrations, and has avoided being labelled as partisan. He believes this should give her strong standing to push for a stimulus package in the first quarter, and that her economic credibility could get the Phase 4 package back on track.
COVID vaccines CLSA
3. AstraZeneca, the elixir for EM?Tony Ren at CLSA says the AstraZeneca vaccine is a giant step forward in ending the pandemic, even though its efficacy is lower than vaccines previously announced by Pfizer and Moderna, That’s because its low cost could help stretch the vaccination budget globally, partly down to the company’s no-profit pledge for the duration of the Covid-19 pandemic, Ren explains, its vaccine is the cheapest so far, at a cost of $2.90 per dose. In contrast, he says Pfizer is said to be asking $19.50 and Moderna $32-37 per dose. In addition, Ren says the fact that the AstraZeneca vaccine uses normal cold-chain infrastructure, rather than the ultra-low storage requirements for the other two, makes it possible to be deployed in developing countries where the more costly mRNA vaccines may face logistical challenges. To put this context, he says, 12 people can be vaccinated on AstraZeneca’s vaccine for the same cost of inoculating one person using the Moderna vaccine, excluding the cost of cold chain and shipping. That said, there are still some open questions about the vaccine, says Ren. How durable is the protection, whether it works for the elderly – say over 80 years old – or those with a comorbidity, whether the inoculated people are still able to spread the virus, and whether it truly prevents (subclinical) infection (as suggested by Oxford University) or merely prevents serious illness.
Equities market breadth Ned Davis Research
4. Vaccine nearly 90% effective in killing divergencesOne of the problems with the market this year was that the average stock was flat or struggling, says Ned Davis at Ned Davis Research, but with a vaccine coming, leadership has broadened considerably. As he points out, a very strong majority of the stocks he covers – close to 90% – are now trading above their 10- and 40-week moving averages. Part of the theory of technical analysis, according to Davis, is that the market is healthier when it is rising broadly, and one of the oldest measures of a healthy market in technical analysis – the so-called Dow Theory – is currently bullish. He says, however, that while he doesn’t like to “fight the tape”, the fact that the performance of FANMAG stocks, which look overbought, have failed to confirm the new highs registered on the S&P 500 makes him cautious. It is hard to know whether this minor divergence means anything because it is too soon to say, says Davis, but stay tuned.
Copper EVs miners Jefferies
5. Is there enough copper for the Green Wave?Christopher LaFemina at Jefferies says the path of least resistance for copper prices is higher, and the squeeze higher is a question of “when” not “if” as demand from renewable energy providers and electric vehicle (EV) manufacturers kicks in over the coming decades. He says moves to meet climate change commitments could see demand for copper from renewable power providers rise by up to five times, while EV manufacturers present a similar structural growth story for copper prices, given that each EV contains about 60 kg more of the metal than those with traditional internal combustion engines. The net effect, says LaFemina is that demand for copper will significantly exceed supply under all scenarios of renewable energy and EV build out in the coming years. Furthermore, he believes that while many hedge funds are long this trade, many long-only investors have avoided copper believing that it was a cyclical trade leveraged to global economic activity. While that may have been historically true, he believes what is about to unfold is a secular multi-decade growth story for copper demand that is not yet priced into the metal or the miners. Accordingly, Lafemina has increased his copper price forecasts, raising his 2025 estimate by 13% to $4.25/lb, and while Freeport and First Quantum remain his preferred among copper miners, he has upgraded both Glencorp and Antofagasta from hold to buy.